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United States Securities and Exchange Commission
Washington, D.C. 20549
 
Form 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the fiscal year ended December 31, 2021.
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the transition period from _____________________ to _____________________.
 
Commission file number 000-04604
 
Cincinnati Financial Corporation
(Exact name of registrant as specified in its charter)
 
Ohio31-0746871
(State of incorporation)(I.R.S. Employer Identification No.)

 6200 S. Gilmore Road
Fairfield, Ohio 45014-5141
(Address of principal executive offices) (Zip Code)
(513) 870-2000
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $2.00 parCINFNasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes       No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes       No
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 if Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes       No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Cincinnati Financial Corporation - 2021 10-K - Page 1


 
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company
Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No

The aggregate market value of voting stock held by nonaffiliates of the Registrant based on the closing price of $116.62 per share as reported on Nasdaq Global Select Market on June 30, 2021, was $18,398,492,958.
 
As of February 15, 2022, there were 160,433,769 shares of common stock outstanding.
 
Document Incorporated by Reference
 
Portions of the definitive Proxy Statement for Cincinnati Financial Corporation’s Annual Meeting of Shareholders to be held on May 7, 2022, are incorporated by reference into Part III of this Form 10-K.
Cincinnati Financial Corporation - 2021 10-K - Page 2


2021 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS
Part I
Item 1.Business
Cincinnati Financial Corporation – Introduction
Our Business and Our Strategy
Our Segments
Other
Regulation
Item 1A.Risk Factors
Item 1B.Unresolved Staff Comments
Item 2.Properties
Item 3.Legal Proceedings
Item 4.Mine Safety Disclosures
Part II
Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.[Reserved]
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Executive Summary
Critical Accounting Estimates
Recent Accounting Pronouncements
Financial Results
Liquidity and Capital Resources
Safe Harbor Statement
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Item 8.Financial Statements and Supplementary Data
Responsibility for Financial Statements
Management’s Annual Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.Controls and Procedures
Item 9B.Other Information
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections


Cincinnati Financial Corporation - 2021 10-K - Page 3


Part III
Item 10.Directors, Executive Officers and Corporate Governance
Item 11.Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.Certain Relationships and Related Transactions, and Director Independence
Item 14.Principal Accounting Fees and Services
Part IV
Item 15.Exhibit and Financial Statement Schedules
Item 16Form 10-K Summary

Cincinnati Financial Corporation - 2021 10-K - Page 4


Part I

ITEM 1.    Business

Cincinnati Financial Corporation – Introduction
We are an Ohio corporation formed in 1968. Our lead subsidiary, The Cincinnati Insurance Company, was founded in 1950. Our main business is property casualty insurance marketed through independent insurance agencies in 46 states. Our headquarters is in Fairfield, Ohio.
 
Cincinnati Financial Corporation owns 100% of four subsidiaries: The Cincinnati Insurance Company (Cincinnati Insurance), Cincinnati Global Underwriting Ltd.SM (Cincinnati Global), CSU Producer Resources Inc. and CFC Investment Company. In addition, the parent company has an investment portfolio, owns the headquarters property and is responsible for corporate borrowings and shareholder dividends.
 
The Cincinnati Insurance Company owns 100% of four additional insurance subsidiaries. Our standard market property casualty insurance group includes two of those subsidiaries – The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group writes a broad range of business, homeowner and auto policies. The Cincinnati Insurance Company also conducts the business of our reinsurance assumed operations, known as Cincinnati Re®. Other subsidiaries of The Cincinnati Insurance Company include: The Cincinnati Life Insurance Company (Cincinnati Life), which provides life insurance policies and fixed annuities; and The Cincinnati Specialty Underwriters Insurance Company (Cincinnati Specialty Underwriters), which offers excess and surplus lines insurance products. In this report and elsewhere we often refer to any or all of these five companies as The Cincinnati Insurance Companies.
 
Cincinnati Global owns 100% of Cincinnati Global Underwriting Agency Ltd.SM, a London-based, global specialty underwriter for Lloyd's Syndicate 318, and Cincinnati Global Dedicated No. 2 Ltd.SM, a Lloyd’s corporate member and vehicle through which capital is provided by Cincinnati Financial Corporation and third-party names at Lloyd’s.

The two noninsurance subsidiaries of Cincinnati Financial Corporation are CSU Producer Resources, which offers insurance brokerage services to our independent agencies so their clients can access our excess and surplus lines insurance products; and CFC Investment Company, which offers commercial leasing and financing services to our agencies, their clients and other customers.
 
Our filings with the U.S. Securities and Exchange Commission (SEC) are available on our website,
cinfin.com/investors, as soon as possible after they have been filed with the SEC. Reports filed with the SEC may also be viewed at sec.gov. These filings include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and exhibits and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. In this report we reference various websites. These websites, including our own, are not incorporated by reference in this Annual Report on Form 10-K.
 
Periodically, we refer to estimated industry data so that we can give information about our performance versus the overall U.S. insurance industry. Unless otherwise noted, the industry data is prepared by A.M. Best, a leading insurance industry statistical, analytical and insurer financial strength and credit rating organization. Information from A.M. Best is presented on a statutory accounting basis for insurance company regulation in the United States of America. When we provide our results on a comparable statutory accounting basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).
 
Cincinnati Financial Corporation - 2021 10-K - Page 5


Our Business and Our Strategy
Introduction
The Cincinnati Insurance Company was founded more than 70 years ago by four independent insurance agents. They established the mission that continues to guide all of the companies in the Cincinnati Financial Corporation family – to grow profitably and enhance the ability of local independent insurance agents to deliver quality financial protection to the people and businesses they serve by:
providing insurance market stability through financial strength
producing competitive, up-to-date products and services
developing associates committed to superior service

At year-end 2021, a select group of independent agencies in 46 states actively marketed our property casualty insurance within their communities. Standard market commercial lines and excess and surplus lines policies were marketed in 41 of those states. Personal lines policies were marketed in 45 of those states. Within our select group of agencies, we also seek to become the life insurance carrier of choice and to help agents and their clients – our policyholders – by offering leasing and financing services.
 
Three competitive advantages distinguish our company, positioning us to build shareholder value and to be successful overall:
Commitment to our professional independent insurance agencies and to their continued success
Financial strength to fulfill our promises and be a consistent market for our agents’ business, supporting stability and confidence
Operating structure that supports local decision making, showcasing our claims excellence and allowing us to balance growth with underwriting discipline

Management and our board of directors has developed an agency-focused strategy that we believe positions our company for long-term success and value creation, while managing difficult economic, market or pricing cycles. We broadly group our key strategic initiatives into two areas of focus – managing insurance profitability and driving premium growth, as summarized below. Our strategic priorities include meeting the wants and needs of our agent customers, attracting and developing talented associates, achieving best-in-class field service and continually enhancing operational efficiency and effectiveness. To help guide our strategic efforts, we have placed an emphasis on innovation to accelerate operational improvement and to also favorably position us for the future. We find innovative ideas in many places, including: internally through management and other associates, with our traditional business partners and in the start-up business community.

Manage insurance profitability – Implementation of these initiatives is intended to enhance underwriting expertise and knowledge, thereby increasing our ability to manage our business while also gaining efficiency. Better profit margins may be achieved with additional information and expanded pricing capabilities we can access with the use of technology and analytics. This includes segmentation efforts that emphasize identification and retention of insurance policies we believe have relatively stronger pricing, while seeking more aggressive renewal terms and conditions on policies we believe have relatively weaker pricing. In addition to enhancing company efficiency and more quickly deploying product or service enhancements, improving internal processes also supports the ability of the independent agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses as we make it easier for them to do business with us.
Drive premium growth – Implementation of these initiatives is intended to further penetrate each market we serve through our appointed independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. This includes increasing opportunities for agencies to cross-serve their clients by providing updated products and services that aim to meet their life insurance needs. We continue to increase our capabilities to successfully underwrite both larger commercial policies, which we refer to as key accounts, or small business accounts that require greater efficiency. Premium growth initiatives also include expansion of Cincinnati Re and Cincinnati Global. Diversified growth also may reduce variability of losses from weather-related catastrophes.

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Independent Insurance Agency Marketplace
The U.S. property casualty insurance industry is a highly competitive marketplace with more than 2,000 stock and mutual companies (carriers) operating independently or in groups.

For the most part, we compete with standard market insurance companies that market through independent insurance agents. Agencies marketing our commercial lines or personal lines products typically represent several standard market insurance carriers. We also compete with carriers that market through captive agents representing a single carrier or that market directly to consumers, sometimes offering a less broad range of insurance products. Some of our agencies describe their roles as brokers instead of agents. Distribution through independent insurance agents or brokers represents nearly 60% of overall U.S. property casualty insurance premiums and approximately 80% of commercial property casualty insurance premiums, according to studies by the Independent Insurance Agents and Brokers of America.
 
We are fully committed to the independent agency channel for marketing our insurance policies. For marketing standard lines insurance products, we choose independent agencies that share our philosophies. They generally do business person to person; offer broad, value-added services; and manage their agencies professionally, targeting long-term success. We develop our relationships with agencies, providing important knowledge of local market trends, opportunities and challenges.

Our associates work to support agencies with tools and resources that help communicate the value of choosing an independent insurance agent and our insurance policies to their clients and prospective clients. We help our agencies meet the broader needs of their clients and increase and diversify their revenues and profitability by offering insurance solutions beyond our standard market property casualty insurance products. We market life insurance products through the agencies that offer our property casualty products and through other independent life agencies that represent Cincinnati Life without also representing our other subsidiaries. We operate our own excess and surplus lines insurance brokerage firm and insurance carrier so that we can offer our excess and surplus lines products exclusively to the independent agencies who market our other property casualty insurance products. Insurers operating in the excess and surplus lines marketplace generally market business through nonaffiliated excess and surplus lines brokers.

The specialized nature of our other insurance operations helps avoid conflicts with the independent agency distribution channel. Cincinnati Re typically markets through broker organizations or similar intermediaries that specialize in reinsurance. Cincinnati Global markets its business through brokers and coverholders. Coverholders are entities that can be authorized by a Lloyd's syndicate to underwrite policies, manage risks, collect premiums or arrange claims settlements up to agreed upon limits.

The table below includes data about property casualty agency relationships that market our standard market insurance products. It does not include Lloyd's brokers or coverholders that source business for Cincinnati Global.
Agency DataYears ended December 31,
 20212020
Property casualty agency relationships, January 11,8481,796
New appointments that market all or most of The Cincinnati Insurance Companies' products155133
New appointments that market only personal lines insurance products for Cincinnati Insurance5958
Changes due to consolidation and other(141)(139)
Property casualty agency relationships, December 311,9211,848
Property casualty reporting locations2,7212,578
New relationship appointments159119
Active states4645

The annual total of agency new appointments may be partially offset by other changes in agency structures, such as consolidation through mergers or acquisitions. An increasing number of agencies have multiple, separately identifiable locations, reflecting their growth as well as consolidation of ownership within the independent
Cincinnati Financial Corporation - 2021 10-K - Page 7


agency marketplace. The number of reporting agency locations indicates our agents’ regional scope and the extent of our presence within our active states. The difference between new appointments in total and the number of new relationships represents either: new branch offices opened by existing Cincinnati agencies; or agencies that merged with another Cincinnati agency and we still believed would produce a meaningful amount of new business premiums.
 
On average, we have a 5.5% share of the standard lines property casualty insurance purchased through our reporting agency locations, according to 2020 data from agency surveys. Our share is 11.6% in reporting agency locations that have represented us for more than 10 years; 4.3% in agencies that have represented us for six to 10 years; 1.9% in agencies that have represented us for two to five years; and 0.3% in agencies that have represented us for one year or less.
 
Our largest single agency relationship accounted for approximately 0.6% of our total property casualty earned premiums in 2021. No aggregate locations under a single ownership structure accounted for more than 5% of our earned premiums in 2021.
 
Financial Strength
We believe that our financial strength and strong capital and surplus position, reflected in our insurer financial strength ratings, are clear, competitive advantages in the segments of the insurance marketplace that we serve. This strength supports the consistent, predictable performance that our policyholders, agents, associates and shareholders have always expected and received, helping us withstand significant challenges.
 
Effective capital management is an important part of creating long-term shareholder value, serving as a foundation to support other strategic areas focused on profitable growth of our insurance business. Our capital management philosophy is intended to preserve and build our capital while maintaining appropriate liquidity.

While the potential exists for short-term financial performance variability due to our exposures to possible natural or man-made catastrophes or to significant capital market losses, the rating agencies consistently assert that we have built appropriate financial strength and flexibility to manage that variability. We remain committed to strategies that emphasize being a consistent, stable market for our agents’ business rather than seeking short-term benefits that might accrue by quick, opportunistic reaction to changes in market conditions.
 
We use various principles and practices such as diversification and enterprise risk management to maintain strong capital. For example, we maintain a diversified investment portfolio by reviewing and applying specific parameters and tolerances.
Our $13.022 billion fixed-maturity portfolio is diversified and exceeds total insurance reserves. The portfolio had an average rating of A3/A, and its fair value exceeded total insurance reserve liabilities by approximately 26% at December 31, 2021. No corporate bond exposure accounted for more than 0.9% of our fixed-maturity portfolio, and no municipal exposure accounted for more than 0.2%.
The strength of our fixed-maturity portfolio provides an opportunity to invest for potential capital appreciation by purchasing equity securities. Our $11.315 billion equity portfolio minimizes concentrations in single stocks or industries. At December 31, 2021, no single security accounted for more than 8.0% of our portfolio of publicly traded common stocks, and no single sector accounted for more than 32%.
Strong liquidity increases our flexibility through all periods to maintain our cash dividend and to continue to invest in and expand our insurance operations. At December 31, 2021, we held $5.099 billion of our cash and invested assets at the parent-company level, of which $4.774 billion, or 93.6%, was invested in common stocks, and $211 million, or 4.1%, was cash and cash equivalents.
 
We minimize reliance on debt as a source of capital, with a debt-to-total-capital ratio of 6.0% at year-end 2021. Long-term debt at year-end 2021 totaled $789 million, up $1 million from year-end 2020, and our short-term debt was $54 million, matching the end of the prior year. The long-term debt consists of three nonconvertible, noncallable debentures, two due in 2028 and one in 2034. Ratings for our long-term debt are discussed in Item 7, Liquidity and Capital Resources, Long-Term Debt of Management’s Discussion and Analysis.
 
Cincinnati Financial Corporation - 2021 10-K - Page 8


At year-end 2021 and 2020, risk-based capital (RBC) for our standard market property casualty insurance, excess and surplus lines insurance and life insurance subsidiaries was strong, far exceeding regulatory requirements.
We ended 2021 with a 0.9-to-1 ratio of property casualty premiums to surplus, a key measure of property casualty insurance company capacity and security. A lower ratio indicates more security for policyholders and greater capacity for growth by an insurer. We believe our ratio provides ample flexibility to diversify risk by expanding our operations into new geographies and product areas. The estimated industry average ratio was 0.7-to-1 at year-end 2021, based on industry data reported through the first nine months of 2021. On a statutory consolidated property casualty insurance basis, our ratio of investments in common stock, at fair value, to statutory capital and surplus was 83.6% at year-end 2021 compared with 82.6% at year-end 2020.
We ended 2021 with a 7.4% ratio of life statutory adjusted risk-based surplus to liabilities, a key measure of life insurance company capital strength. A higher ratio indicates an insurer’s stronger security for policyholders and capacity to support business growth. Our life insurance subsidiary’s RBC at year-end 2021 was 5.0 times the authorized control level RBC.
(Dollars in millions) Statutory Information
At December 31,
 20212020
Standard market property casualty insurance subsidiary  
Statutory capital and surplus$7,247 $5,838 
Risk-based capital 7,279 5,860 
Authorized control level risk-based capital1,093 924 
Risk-based capital to authorized control level risk-based capital ratio6.7 6.3 
Written premium to surplus ratio0.9 1.0 

Cincinnati Financial Corporation’s senior debt is rated by four independent rating firms. In addition, the rating firms award our property casualty and life operations insurance financial strength ratings based on their quantitative and qualitative analyses. These ratings assess an insurer’s ability to meet financial obligations to policyholders and do not necessarily address all of the matters that may be important to shareholders. Ratings may be subject to revision or withdrawal at any time by the ratings agency, and each rating should be evaluated independently of any other rating.
 
At February 23, 2022, our insurance subsidiaries continued to be highly rated.
Insurer Financial Strength Ratings
Rating
agency
Standard market property
casualty insurance subsidiary
Life insurance
subsidiary
Excess and surplus lines
insurance subsidiary
Outlook
 Rating
Tier
Rating
Tier
Rating
Tier
A.M. Best Company
  ambest.com
A+Superior2 of 16A+Superior2 of 16A+Superior2 of 16Stable
Fitch Ratings
  fitchratings.com
A+Strong5 of 21A+Strong5 of 21---Stable
Moody's Investors
  Service
  moodys.com
A1Good5 of 21------Stable
S&P Global Ratings
  spratings.com
A+Strong5 of 21A+Strong5 of 21---Stable

On February 2, 2022, A.M. Best affirmed its ratings, continuing its stable outlook. On November 17, 2021, Fitch affirmed its ratings, continuing its stable outlook. On July 30, 2021, Moody's affirmed its ratings, continuing its stable outlook. On July 26, 2021, S&P affirmed its ratings, continuing its stable outlook.
 
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Operating Structure
We offer our broad array of insurance products through the independent agency distribution channel. We recognize that locally based independent agencies have relationships in their communities and local marketplace intelligence that can lead to profitable business and policyholder satisfaction and loyalty. Several of our strategic initiatives are intended not only to help us compete but also to enhance support of agencies that represent us, thereby contributing to agency success. We seek to be a consistent and predictable property casualty carrier that agencies can rely on to serve their clients.
 
In our 10 highest volume states for consolidated property casualty premiums, 1,359 reporting agency locations wrote 52.1% of our 2021 consolidated property casualty earned premium volume compared with 1,316 locations and 53.3% in 2020. We continue efforts to geographically diversify our property casualty risks.
 
Our 10 largest states based on property casualty premium volume, excluding Cincinnati Re and Cincinnati Global, are shown in the table below.
(Dollars in millions)Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
Year ended December 31, 2021    
Ohio$889 14.4 %253 $3.5 
Illinois339 5.5 173 2.0 
North Carolina291 4.7 110 2.6 
Georgia289 4.7 110 2.6 
Pennsylvania282 4.6 152 1.9 
Indiana266 4.3 113 2.4 
New York264 4.3 160 1.7 
Tennessee204 3.3 69 3.0 
Michigan200 3.2 143 1.4 
Virginia195 3.1 76 2.6 

Field Focus Emphasizing Service
We rely on our force of 1,814 field associates to provide service and be accountable to our agencies for decisions we make at the local level. These associates live in the communities our agents serve, so they are readily available when agencies or policyholders need them. While their work is often conducted at the premises of the agency or policyholder, they also work from offices in their homes. Headquarters associates support agencies and field associates with underwriting, accounting, technology assistance, training and other services. Company executives and headquarters associates typically travel to visit agencies, strengthening the personal relationships we have with these organizations. Agents have opportunities for direct, personal conversations with our senior management team, and headquarters associates have opportunities to refresh their knowledge of marketplace conditions and field activities.
 
The field team is coordinated by field marketing representatives responsible for underwriting new commercial lines business. They are joined by field representatives specializing in claims, loss control, commercial lines key accounts, personal lines, excess and surplus lines, machinery and equipment, management liability and surety, premium audit and life insurance. The field team provides a variety of services, such as recommending specific actions to improve the safety of the policyholder’s operations. We seek to develop long-term relationships by understanding the unique needs of each agency's clients, who are also our policyholders.
 
Technology enhances our service to agencies, allowing them to more easily access our systems and process business transactions. Policyholders can conveniently access pertinent policy information online, helping to reduce costs for agencies and the company. Technology and ongoing training also help our associates collaborate and process business efficiently, providing more time for personal service to agencies and their clients.

We also provide and continue to develop enhanced, tailored services offered at the time a claim is reported for an insured loss event. Those services include assisting with car rental or towing, arranging temporary housing and coordinating emergency repairs to homes so additional damage is minimized.
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Our claims philosophy reflects our belief that we prosper as a company by responding to claims person to person, paying covered claims promptly, preventing false claims from unfairly adding to overall premiums and building financial strength to meet future obligations.
 
Our 894 locally based field claims associates work from their homes and are assigned to specific agencies. They respond personally to policyholders and claimants and are equipped to handle a claim from nearly anywhere. We believe we have a competitive advantage because of the person-to-person approach and the resulting high level of service that our field claims representatives and Express Claims Center associates deliver. For field claims associates handling excess and surplus lines claims, guidance is provided by headquarters-based excess and surplus lines claims managers. Claims may be reported directly to us by calling our claims call center, online via our company website or through the MyCincinnati app using a mobile device.

Catastrophe response teams are comprised of our experienced field claims associates who have the authority they need to do their jobs. In times of widespread loss, our field claims representatives confidently and quickly resolve claims, with the ability to provide claims payments on the same day they inspect the loss. Technology helps to enable fast initial contact with policyholders and easy sharing of information and data among storm teams, headquarters associates and local field claims representatives. When hurricanes or other weather events are predicted, we can identify through mapping technologies the expected number of our policyholders that may be impacted by the event and choose to have catastrophe response team members travel to strategic locations near the expected impact area. They are then in position to quickly get to the affected area and begin providing service to policyholders.

Our 31 associates working in the Special Investigations Unit (SIU) include former law enforcement and claims professionals whose qualifications make them well suited to gathering facts to uncover potential fraud. While we believe our job is to pay what is due under each policy contract, we also want to prevent false claims from unfairly increasing overall premiums. Our SIU also operates a computer forensics lab that supports field investigation efforts in various ways including assistance with video evidence and data recovery.

We seek to attract and retain high-quality independent insurance agencies with knowledgeable, professional staffs. In turn, we make an exceptionally strong commitment to assist them in keeping their knowledge up to date and educating new people they bring on board as they grow. This includes offering classes, usually at no cost to agencies, except travel-related expenses they may incur, and other training support. We also offer noninsurance financial services. We believe that providing these services enhances agency relationships with the company and their clients, increasing loyalty while diversifying the agency’s revenues.
 
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Human Capital
At the end of 2021, we employed 5,166 associates, including 3,284 headquarters associates who provide support to 1,814 field associates and 68 associates for Cincinnati Global. The associate voluntary turnover rate had been approximately 5% for several years prior to 2021, when it increased to approximately 10%.

We believe our compensation, training, technology, inclusive culture and other support help to develop, attract and retain our associates, which is critical to our strategy that emphasizes superior service to agencies and their clients, as described in this report. Our goal is to hire job candidates with promise, matching their strengths to positions within the company and providing resources to help them meet professional and personal goals. We are committed to providing equal opportunity for all associates, encouraging a work environment free from unlawful discrimination and harassment.

We use multiple channels to ensure we recruit a diverse workforce rich with ideas and knowledge. For example, we build relationships with future talent by partnering with career services departments, faculty and staff, and Diversity and Inclusion Offices at local and regional colleges and universities along with historically Black colleges and universities.

We offer a base pay level for all roles that is competitive, market-based and re-evaluated on a recurring basis. The base pay is complemented by a matching 401(k) program, annual cash bonus and stock ownership opportunities along with healthcare benefits to provide a comprehensive compensation and benefits package. In addition, we have many special programs that appeal to associates while aligning with our corporate values. Despite an uptick during 2021 in our voluntary turnover rate, we believe it indicates overall associate satisfaction with their working environment, compensation and benefits.

We strive to offer equal pay for equal work and use independent consultants to conduct gender and ethnic minority pay equity studies examining total direct compensation, which consists of base salary, cash bonus and equity awards. Using a multivariate regression analysis, the independent studies in 2021 showed that we administer pay fairly and equitably because the factors used to make compensation decisions, such as role, salary grade, tenure and performance do in fact drive compensation awarded to each associate. More information about the studies is available in our Environmental, Social and Governance Report available on the Sustainability page of our website, cinfin.com/sustainability, which is not incorporated by reference in this Annual Report on Form 10-K.

We offer all regular, full- and part-time associates the opportunity to participate in the CFC Savings Plan, our 401(k) plan. We also offer all full-time associates the opportunity to purchase health, prescription, vision and dental insurance. Associates enrolled in our health plan can receive a free biometric screening – either onsite at our headquarters or with their personal physician. The screening helps associates learn about their health and identify risk factors while earning a company contribution into their Health Savings Account.

While providing stock compensation at all levels of an organization may not be a common business practice, we firmly believe that stock ownership helps drive good decision making and encourages a long-term view by associates. We historically grant annual stock-based compensation to full-time, salaried associates in the form of stock options and restricted stock units that vest over time. In addition, each year all regular, full-time associates – salaried and hourly – are awarded one share of stock for each full calendar year of service, up to 10 shares, through our Holiday Stock Plan.

Additional human capital information is available in our Environmental, Social and Governance Report available on the Sustainability page of our website, cinfin.com/sustainability.

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Insurance Products
We provide well-designed property casualty and life insurance products to bring policyholders convenience, discounts and a reduced risk of coverage gaps or disputes. For most agencies that represent us, we believe we offer insurance solutions for approximately 75% of the typical insurable risks of their clients. Products for various business lines within our reporting segments include insurance coverages for business property and liability, automobiles and homes.

The table below shows net written premiums by segment and business line at year-end 2021, 2020 and 2019. We discuss our insurance segments in their respective sections later in this report.
(Dollars in millions)202120202019Percent of total 2021
Segment:    
Commercial lines insurance$3,811 $3,534 $3,410 55.8 %
Personal lines insurance1,594 1,503 1,435 23.4 
Excess and surplus lines insurance426 348 303 6.2 
Life insurance346 328 318 5.1 
Other648 479 368 9.5 
Total$6,825 $6,192 $5,834 100.0 %
    
Business line:    
Commercial lines insurance:
Commercial casualty$1,315 $1,205 $1,131 19.2 %
Commercial property1,090 1,019 985 16.0 
Commercial auto816 763 735 12.0 
Workers' compensation269 266 294 3.9 
Other commercial321 281 265 4.7 
Total commercial lines insurance3,811 3,534 3,410 55.8 
Personal lines insurance:    
Personal auto608 611 620 8.9 
Homeowner769 693 631 11.3 
Other personal217 199 184 3.2 
Total personal lines insurance1,594 1,503 1,435 23.4 
Excess and surplus lines insurance426 348 303 6.2 
Life insurance:
Term life insurance218 202 196 3.2 
Universal life insurance34 34 37 0.5 
Other life insurance and annuity products94 92 85 1.4 
Subtotal346 328 318 5.1 
Other648 479 368 9.5 
Total$6,825 $6,192 $5,834 100.0 %


 
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Our Segments
Consolidated financial results primarily reflect the results of our five reporting segments. These segments are defined based on financial information we use to evaluate performance and to determine the allocation of assets.
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Life insurance
Investments
Revenues, income before income taxes and identifiable assets for each segment are shown in Item 8, Note 18 of the Consolidated Financial Statements. Some of that information is discussed in this section, where we explain the business operations of each segment. The financial performance of each segment is discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Cincinnati Financial Corporation - 2021 10-K - Page 14


Commercial Lines Insurance Segment
In 2021, the commercial lines insurance segment contributed net earned premiums of $3.674 billion, representing 38.2% of consolidated total revenues. This segment reported profit before income taxes of $598 million. Commercial lines net earned premiums rose 6% in 2021 and 5% in 2020.
 
We believe that our commercial lines business is best measured and evaluated on a segment basis. However, we also provide selected line of business data to summarize growth and profitability trends separately for our business lines. The five commercial business lines are:
Commercial casualty – Provides coverage to businesses against third-party liability from accidents occurring on their premises or arising out of their operations, including injuries sustained from products or liability related to professional services. Specialized casualty policies may include similar coverage such as umbrella liability or employment practices. The commercial casualty business line includes liability coverage written as part of commercial package policies.
Commercial property – Provides coverage for loss or damage to buildings, inventory and equipment caused by covered causes of loss such as fire, wind, hail, water, theft and vandalism, as well as business interruption resulting from a covered loss. Commercial property also includes other coverages such as inland marine, which covers losses related to builder’s risk, cargo or equipment. Various property coverages can be written as stand-alone policies or can be added to a commercial package policy.
Commercial auto – Protects businesses against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicles, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists.
Workers’ compensation – Covers employers for government-specified benefits from work-related injuries to employees.
Other commercial lines – This includes several other types of insurance products for businesses, including:
Management liability and surety – Includes director and officer (D&O) liability insurance, which covers liability for actual or alleged errors in judgment, breaches of duty or other wrongful acts related to activities of organizations and can optionally include other liability coverages. We market primarily to nonprofit organizations, privately held businesses, healthcare organizations, financial institutions and educational institutions. The for-profit portion includes approximately 170 bank or savings and loan financial institutions, with none having assets of $1 billion or more. The surety portion includes contract and commercial surety bonds for losses resulting from dishonesty, failure to perform and other acts and also includes fidelity bonds for fraudulent acts by specified individuals or dishonest acts by employees. Management liability coverage can also include cyber insurance as an affirmative coverage option on various insurance policies. We cede all of the related premiums to a reinsurer, therefore transferring substantially all of that risk. Ceded premiums for 2021 included $37 million for cyber insurance.
Machinery and equipment – Specialized coverage provides protection for loss or damage to boilers and machinery, including production and computer equipment and business interruption, due to sudden and accidental mechanical breakdown, steam explosion or artificially generated electrical current.

Our history of emphasizing products and services that agencies can market to small or midsized businesses in their communities remains a critical piece of our strategy even as we expand our appetite to insure larger businesses. While some of our property casualty agencies market only our personal lines or management liability and surety products, approximately 84% offer some or all of our standard market commercial insurance products.
 
Cincinnati Financial Corporation - 2021 10-K - Page 15


In 2021, our 10 highest volume commercial lines states generated 56.7% of our earned premiums compared with 57.1% in 2020. The aggregate number of reporting agency locations in our 10 highest volume states increased to 1,174 in 2021 from 1,150 in 2020.

Our 10 largest states based on commercial lines premium volume are shown in the table below.
(Dollars in millions)Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
Year ended December 31, 2021    
Ohio$539 14.7 %242 $2.2 
Illinois225 6.1 152 1.5 
Pennsylvania219 6.0 140 1.6 
North Carolina195 5.3 108 1.8 
Indiana183 5.0 109 1.7 
Virginia152 4.1 70 2.2 
Georgia151 4.1 96 1.6 
Tennessee146 4.0 69 2.1 
Missouri137 3.7 55 2.5 
Michigan136 3.7 133 1.0 

For new commercial lines business, policy-by-policy underwriting and pricing is coordinated by our locally based field marketing representatives who are also responsible for selecting new independent agencies. Our agents and our team of field associates get to know the people and businesses in their communities and can make informed decisions about each risk.
 
Commercial lines policy renewals are managed by headquarters underwriters who are assigned to specific agencies and consult with local field associates as needed. As part of our team approach, headquarters underwriters also help oversee agency growth and profitability. They are responsible for formal issuance of all new business and renewal policies as well as policy endorsements. Further, the headquarters underwriters provide day-to-day customer service to agencies and our field marketing representatives by offering technical and industry expertise and product training, helping to determine underwriting eligibility and assisting with the mechanics of premium determination. We also continue a target markets emphasis to analyze opportunities and to develop new products and services, new coverage options and improvements to existing insurance products.
 
Understanding evolving market conditions is a critical function for our success, accomplished through both informal commentary and formal reviews. Informally, our field marketing representatives, underwriters and product development associates routinely receive market intelligence from a variety of channels, including from the agencies with which they work. This market information helps identify the top competitors and our market strengths and weaknesses. The information obtained encompasses pricing, breadth of coverage and use of underwriting guidelines.

Our historical emphasis on small to midsized businesses is reflected in the mix of our commercial lines premium volume by policy size. Approximately 75% of our commercial in-force policies have annual premiums of $10,000 or less, accounting in total for approximately 20% of our 2021 commercial lines premium volume. The remainder of policies have annual premiums greater than $10,000, including policies with annual premiums greater than $100,000 that account for approximately 30% of our 2021 commercial lines premium volume. Our average commercial lines policy size is approximately $13,000 in annual premiums.
 
Our commercial lines packages typically are offered on a three-year policy term for most insurance coverages – a key competitive advantage. In our experience, multi-year packages appeal to the quality-conscious insurance buyers who we believe are typical clients of our independent agents. Customized insurance programs on a three-year term complement the long-term relationships these policyholders typically have with their agents and with our company. By reducing annual administrative efforts, multi-year policies lower expenses for our company and for our agents. The commitment we make to policyholders encourages long-term relationships and reduces their need to annually re-evaluate their insurance carrier or agency. We believe that the advantages of three-year policies in
Cincinnati Financial Corporation - 2021 10-K - Page 16


terms of improved policyholder convenience, increased account retention and reduced administrative costs outweigh the potential disadvantage of these policies, even in periods of rising rates.
 
Although we offer three-year policy terms, premiums for some coverages within those policies are adjustable at the anniversary for the next annual period, and policies may be canceled at any time at the discretion of the policyholder. Contract terms often provide that rates for property, general liability, inland marine and crime coverages, as well as policy terms and conditions, are fixed for the term of the policy. However, the exposure we insure is reviewed annually, near the policy anniversary date, and the amount of premiums may be adjusted based on changes to that exposure.
 
The general liability exposure basis may be audited annually. Commercial auto, workers’ compensation, professional liability and most umbrella liability coverages within multi-year packages are rated at each of the policy’s annual anniversaries for the next one-year period. The annual pricing could incorporate rate changes approved by state insurance regulatory authorities between the date the policy was written and its annual anniversary date, as well as changes in risk exposures and premium credits or debits relating to loss experience and other underwriting judgment factors. We estimate that approximately 75% of 2021 commercial premiums were subject to annual rating or were written on a one-year policy term. That 75% includes approximately one-third of policies offered on a three-year policy term that expire during any given year.
 
We believe our commercial lines insurance segment premiums reflect a higher concentration, relative to industry commercial lines premiums, in contractor-related businesses. Since economic activity related to construction, which can heavily influence insured exposures of contractors, may experience cycles that vary significantly with the economy as a whole, our commercial lines premium trends could vary from commercial lines premium trends for the property casualty insurance industry. In 2021, we estimated that 39% of our general liability premiums, and 37% of our workers’ compensation premiums, came from the construction industry based on North American Industry Classification System (NAICS) codes.
 
Cincinnati Financial Corporation - 2021 10-K - Page 17


Personal Lines Insurance Segment
The personal lines insurance segment contributed net earned premiums of $1.542 billion to 2021 consolidated total revenues, or 16.0% of the total, and reported profit before income taxes of $97 million. Personal lines net earned premiums rose 5% in 2021 and 4% in 2020.
 
We prefer to write personal lines coverage in accounts that include both auto and homeowner coverages as well as coverages that are part of our other personal business line. At the end of 2021, for example, approximately 83% of our homeowner policies were accompanied by a personal auto policy in the same account. As a result of our account-based approach, we believe that our personal lines business is best measured and evaluated on a segment basis. However, we provide line of business data to summarize growth and profitability trends separately for three business lines:
Personal auto – Protects against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicle, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists. In addition, many states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage.
Homeowner – Protects against losses to dwellings and contents from a wide variety of perils, as well as liability arising out of personal activities both on and off the covered premises. We also offer coverage for condominium unit owners and renters.
Other personal lines – This includes the other types of insurance products we offer to individuals, including dwelling fire, inland marine, personal umbrella liability and watercraft coverages.

At year-end 2021, we marketed personal lines insurance products through 1,974, or approximately 73%, of our 2,721 agency reporting locations. The 1,974 personal lines agency locations were in 45 of the 46 states in which we offered property casualty insurance. Those agencies produced approximately 1.0 million personal lines policies in force for us, representing approximately 385,000 policyholders.

Expansion of our personal lines insurance segment includes marketing through independent agencies to profitably grow our premiums for products and services offered to their high net worth personal lines clients. In 2021, our appointed agencies produced for us approximately $663 million of net written premiums in total from policyholders with insured home values of $1 million or more, up 28% from 2020. We estimate those policyholders represent approximately 20% of our total personal lines policyholders.
 
In 2021, our 10 highest volume personal lines states generated 64.8% of our earned premiums compared with 65.2% in 2020. In 2015, our 10 highest volume personal lines states generated 78.5% of our earned premiums. The reduction in that percentage indicates progress over time toward our long-term objective of geographic diversification through new states for our personal lines operation. The aggregate number of reporting agency locations in our 10 highest volume states increased to 1,002 in 2021 from 957 in 2020.
 
Cincinnati Financial Corporation - 2021 10-K - Page 18


Our 10 largest states based on personal lines premium volume are shown in the table below.
(Dollars in millions)Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
Year ended December 31, 2021    
Ohio$319 20.7 %231 $1.4 
Georgia117 7.6 91 1.3 
New York106 6.9 105 1.0 
Illinois82 5.3 123 0.7 
North Carolina75 4.9 88 0.9 
California70 4.6 70 1.0 
Indiana67 4.3 92 0.7 
Alabama63 4.1 49 1.3 
Michigan51 3.3 100 0.5 
Kentucky47 3.1 53 0.9 

New and renewal personal lines business reflects our risk-specific underwriting philosophy. Each agency selects personal lines business primarily from within the geographic territory that it serves, based in part on agency staff’s knowledge of the risks in those communities or familiarity with the policyholder. We have personal lines field marketing representatives who have underwriting authority and visit agencies on a regular basis. They focus primarily on key states targeted for growth, reinforcing the advantages of our personal lines products and offering training in the use of our policy processing system. Personal lines activities are further supported by headquarters associates assigned to individual agencies.
 
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Excess and Surplus Lines Insurance Segment
The excess and surplus lines segment contributed net earned premiums of $398 million to 2021 consolidated total revenues, or 4.1% of the total, and reported profit before income taxes of $44 million. Excess and surplus lines net earned premium increased 22% in 2021 and 17% in 2020.
 
Our excess and surplus lines policies typically cover business risks with unique characteristics, such as the nature of the business or its claim history, that are difficult to profitably insure in the standard commercial lines market. Excess and surplus lines insurers have more flexibility in coverage terms and rates compared with standard lines companies, generally resulting in policies with higher rates and terms and conditions customized for specific risks, including restricted coverage where appropriate. We target small to midsized risks, and policyholders in many cases also have standard market insurance with one of our other subsidiaries. Our average excess and surplus lines policy size is approximately $8,000 in annual premiums, and the majority have coverage limits of $1 million or less. All of our excess and surplus lines policies are written for a maximum term of one year. Approximately 91% of our 2021 earned premiums for the excess and surplus lines insurance segment provided commercial casualty coverages and about 9% provided commercial property coverages. Those coverages are described below.
Commercial casualty – Covers businesses for third-party liability from accidents occurring on their premises or arising out of their operations, including injuries sustained from products. Other coverages available include miscellaneous errors and omissions, professional liability and excess liability. Typical businesses covered include contractors, manufacturers, real estate owners and managers, retail, consultants, and bars or taverns. Policies covering liability at special events are also available.
Commercial property – Insures buildings, inventory, equipment and business income from loss or damage due to causes such as fire, wind, hail, water, theft and vandalism. Examples of property we commonly insure with excess and surplus lines policies include temporarily vacant buildings, habitational, restaurants and relatively higher-hazard manufacturing classes.

At the end of 2021, we marketed excess and surplus lines insurance products in each of the 41 states in which we offer standard market commercial lines insurance. Offering excess and surplus lines helps agencies representing The Cincinnati Insurance Companies meet the insurance needs of their clients when coverage is unavailable in the standard market. By providing outstanding service, we can help agencies grow and prosper while also profitably growing our property casualty business.
 
In 2021, our 10 highest volume excess and surplus lines states generated 54.9% of our earned premiums, compared with 55.0% in 2020.
 
Our 10 largest states based on excess and surplus lines premium volume are shown in the table below.
(Dollars in millions)Earned
premiums
% of total
earned
Year ended December 31, 2021  
Illinois$31 7.8 %
Ohio30 7.6 
Texas24 6.1 
New York22 5.6 
Pennsylvania22 5.5 
North Carolina21 5.3 
Georgia20 5.0 
Missouri16 4.1 
Indiana16 4.0 
Minnesota16 3.9 
 
Cincinnati Financial Corporation - 2021 10-K - Page 20


Agencies representing The Cincinnati Insurance Companies produce approximately $5 billion in annual premiums for all carriers writing excess and surplus lines policies for their clients. We estimate that approximately half of that premium volume matches the targeted business types and coverages we offer through our excess and surplus lines insurance segment. We structured the operations of this segment to meet the needs of these agencies and to market exclusively through them.
 
Agencies have access to Cincinnati Specialty Underwriters' product line through CSU Producer Resources, the wholly owned insurance brokerage subsidiary of Cincinnati Financial Corporation. CSU Producer Resources has binding authority on all classes of business written through Cincinnati Specialty Underwriters and maintains appropriate agent and surplus lines licenses.
 
We seek to earn a share of each agency’s best excess and surplus lines accounts by offering several unique benefits. Agency producers have direct access through CSU Producer Resources to a group of our underwriters who focus exclusively on excess and surplus lines business. Those underwriters can tap into broader services we offer to provide policyholders additional value and help producers build the relationship through experienced and responsive loss control services and claims handling. CSU Producer Resources gives extra support to our independent agency producers by remitting surplus lines taxes and stamping fees and retaining admitted market diligent search affidavits, where required. Agencies marketing through CSU Producer Resources instead of a competing brokerage generally receive a higher commission because use of our internal brokerage subsidiary eliminates some of the intermediary costs. This business is factored in their profit-sharing agreement with The Cincinnati Insurance Companies. We also offer prompt service, generally issuing approximately 95% of policies within 24 hours of a request to bind a policy.
 
Cincinnati Financial Corporation - 2021 10-K - Page 21


Life Insurance Segment
The life insurance segment contributed $298 million of net earned premiums, representing 3.1% of 2021 consolidated total revenues, and reported a loss before income taxes of $16 million. Life insurance net earned premiums grew 3% in 2021 and 7% in 2020.
 
The Cincinnati Life Insurance Company supports our agency-centered business model by deepening the relationships we have with agents while also diversifying revenue and profitability for both the agency and our company. We primarily focus on life products that feature a steady stream of premium payments and that have the potential for generating revenue growth through increasing demand.
 
Life Insurance Business Lines
Four lines of business that account for more than 99% of the life insurance segment’s revenues are:
Term life insurance – Policies under which a death benefit is payable only if the insured dies during a specific period of time. Policy options include a return of premium provision, a benefit equal to the sum of all paid base premiums that is payable if the insured person survives to the end of the term. The policies are fully underwritten using traditional and accelerated methods.
Worksite products – Term life insurance, return of premium term life insurance and whole life insurance offered to employees through their employer. Premiums are collected by the employer using payroll deduction. Policies are issued using a simplified underwriting approach and on a guaranteed issue basis. Worksite insurance products provide our property casualty agency force with excellent cross-serving opportunities for both commercial and personal accounts.
Whole life insurance – Policies that provide life insurance for the entire lifetime of the insured. The death benefit is guaranteed never to decrease and premiums are guaranteed never to increase. While premiums are fixed, they must be paid as scheduled. These policies provide guaranteed cash values that are available as loans collateralized by the cash surrender value. The policies are fully underwritten.
Universal life insurance – Long-duration life insurance policies that are fully underwritten. Contract premiums are neither fixed nor guaranteed; however, the contract does specify a minimum interest crediting rate and a maximum cost of insurance charge and expense charge. The cash values, available as loans collateralized by the cash surrender value, are not guaranteed and depend on the amount and timing of actual premium payments and the amount of actual contract assessments.

In addition, Cincinnati Life markets:
Deferred annuities that provide regular income payments that commence after the end of a specified period or when the annuitant attains a specified age. During the deferral period, any payments made under the contract accumulate at the crediting rate declared by the company but not less than a contract-specified guaranteed minimum interest rate. A deferred annuity may be surrendered during the deferral period for a cash value equal to the accumulated payments plus interest less the surrender charge, if any.
Immediate annuities that provide some combination of regular income and lump-sum payments in exchange for a single premium.

Cincinnati Financial Corporation - 2021 10-K - Page 22


Life Insurance Distribution
Cincinnati Life is licensed in 49 states and the District of Columbia. At year-end 2021, approximately 80% of our 1,921 property casualty agency relationships offered Cincinnati Life products to their clients. We also develop life business from approximately 356 other independent life insurance agencies. We are careful to solicit business from these other agencies in a manner that does not conflict with or compete with the marketing and sales efforts of our property casualty agencies.
 
When marketing through our property casualty agencies, we have specific competitive advantages:
Because our property casualty operations are held in high regard, property casualty agency management is predisposed to consider selling our life products.
Marketing efforts for both our property casualty and life insurance businesses are directed by our field marketing department, coordinated with our life field marketing representatives, which assures consistency of communication and operations. Life field marketing representatives are available to meet face-to-face with agency personnel and their clients as well. Our life headquarters underwriters and other associates are available to the agents and field team to assist in the placement of business.

We continue to emphasize the cross-serving opportunities of our life insurance, including term and worksite products, for the property casualty agency’s personal and commercial accounts. In both the property casualty and independent life agency distribution systems, we enjoy the advantages of offering competitive, up-to-date products and providing personal attention in combination with financial strength and stability.
Term life insurance is our largest life insurance product line. We continue to develop and offer term products with features our agents indicate are important, such as a return of premium benefit and an accelerated underwriting option.
We also offer products addressing the needs of businesses with key person and buy-sell coverages. We offer quality, personal life insurance coverage to personal and commercial clients of our agencies.
Because of our strong capital position, we can offer a competitive product portfolio, including guaranteed products, giving our agents a marketing edge. Our life insurance company maintains strong insurer financial strength ratings: A.M. Best, A+ (Superior); Fitch, A+ (Strong); and S&P, A+ (Strong). Our life insurance company has chosen not to establish a Moody’s rating.
 
In 2021, our five highest volume states for life insurance premiums, based on information contained in statements filed with state insurance departments, are shown in the table below.
(Dollars in millions)Premiums% of total
Year ended December 31, 2021  
Ohio$57 15.7 %
Pennsylvania27 7.4 
Illinois22 6.0 
Indiana21 5.7 
Georgia19 5.3 

Cincinnati Financial Corporation - 2021 10-K - Page 23


Investments Segment
Revenues of the investments segment are primarily from net investment income and from net investment gains and losses from investment portfolios managed for the holding company and each of the operating subsidiaries.
 
Our investment department operates under risk guidelines set forth in our investment policy along with oversight of the investment committee of our board of directors. These guidelines set parameters for risk tolerances governing, among other items, the allocation of the portfolio as well as security and sector concentrations. These parameters are part of an integrated corporate risk management program. When allocating cash to various asset classes, we consider market-based factors such as risk adjusted after-tax yields as well as internal measures based in part on insurance department regulations and rating agency guidance.
 
The fair value of our investment portfolio was $24.337 billion and $21.194 billion at year-end 2021 and 2020, respectively, as shown in the table below. The overall portfolio increased, reflecting an unrealized gain position and fair value increase. The fair value increased largely due to equity markets that rose during 2021. The unrealized gain position in our fixed-maturity investments decreased in 2021, primarily due to an increase in interest rates such as U.S. Treasury yields.
(Dollars in millions)At December 31, 2021At December 31, 2020
 Cost or amortized costPercent of total Percent of totalCost or amortized costPercent of total Percent of total
 Fair valueFair value
Taxable fixed maturities$8,344 51.0 %$8,858 36.4 %$7,363 48.3 %$8,053 38.0 %
Tax-exempt fixed maturities3,886 23.8 4,164 17.1 3,949 25.9 4,285 20.2 
Common equities3,697 22.6 10,862 44.6 3,640 23.9 8,541 40.3 
Nonredeemable preferred
  equities
424 2.6 453 1.9 287 1.9 315 1.5 
Total$16,351 100.0 %$24,337 100.0 %$15,239 100.0 %$21,194 100.0 %
 
The cash we generate from insurance operations historically has been invested in two broad categories of investments:
Fixed-maturity investments – Includes taxable and tax-exempt bonds and redeemable preferred stocks. During 2021, net purchases offset the combined effect of a net decrease in unrealized gains, sales and calls of fixed-maturity securities in our portfolio. During 2020, net purchases and a net increase in unrealized gains offset sales and calls.
Equity investments – Includes common and nonredeemable preferred stocks. During 2021, the combined effect of purchases and a net increase in fair value offset sales of equity securities in our portfolio. During 2020, purchases and a net increase in fair value offset sales.
 
In addition to securities held in our investment portfolio at year-end 2021, other invested assets included $227 million of private equity investments, $36 million of real estate through direct property ownership and development projects in the United States, $35 million held on deposit at Lloyd's and $31 million of life policy loans.

Our investment portfolio is further described below. Additional information about the composition and valuation of investments is included in Item 8, Note 2, Investments, and Note 3, Fair Value Measurements, of the Consolidated Financial Statements. A detailed listing of our portfolio is updated on our website, cinfin.com/investors, each quarter when we report our quarterly financial results.

Fixed-Maturity Securities Investments
By maintaining a well-diversified fixed-maturity portfolio, we attempt to manage overall interest rate, reinvestment, credit and liquidity risk. We pursue a buy-and-hold strategy and do not attempt to make large-scale changes to the portfolio in anticipation of rate movements. By investing new money on a regular basis and analyzing risk-adjusted after-tax yields, we work to achieve a general laddering effect to our portfolio that may mitigate some of the effects of adverse interest rate movements.
 
Cincinnati Financial Corporation - 2021 10-K - Page 24


At December 31, 2021, our investment-grade and noninvestment-grade fixed-maturity securities represented 80.2% and 5.3% of the portfolio, respectively. The remaining 14.5% represented fixed-maturity securities that were not rated by Moody’s or S&P. Our nonrated securities include smaller municipal issues and private placement corporate securities. Many of these, although not rated by Moody’s or S&P, are rated by the Securities’ Valuation Office of the National Association of Insurance Commissioners (NAIC). Also included in this category are smaller public corporate securities, many of which carry a rating by an agency other than Moody’s or S&P, such as Fitch or Kroll.

Other selected attributes of the fixed-maturity portfolio are shown in the table below. Additional maturity periods and other information for our fixed-maturity portfolio are shown in Item 8, Note 2 of the Consolidated Financial Statements.
 At December 31,
 20212020
Weighted average yield-to-amortized cost4.02 %4.12 %
Weighted average maturity8.0 yrs7.5 yrs
Effective duration4.8 yrs4.5 yrs
 
The fair values of our taxable fixed-maturity securities portfolio at the end of the last two years were:
(Dollars in millions)At December 31,
 20212020
Investment-grade corporate$6,807 $6,416 
States, municipalities and political subdivisions931 712 
Noninvestment-grade corporate690 479 
Commercial mortgage-backed 273 285 
United States government123 120 
Foreign government26 29 
Government-sponsored enterprises8 12 
Total$8,858 $8,053 
 
While our strategy typically is to buy and hold fixed-maturity investments to maturity, we monitor credit profiles and fair value movements when determining holding periods for individual securities. With the exception of U.S. agency issues, no individual issuer's securities accounted for more than 1.3% of the taxable fixed-maturity portfolio at year-end 2021. Investment-grade corporate bonds had an average rating of Baa1 by Moody’s or BBB by S&P at year-end 2021. Our taxable fixed-maturity portfolio included $273 million of commercial mortgage-backed securities with an average rating of Aa2/AA at year-end 2021.
 
Relative to a broad bond market index such as the Barclay’s Aggregate, we are most heavily exposed to the investment grade corporate bond asset class. Within that asset class, we have a weighting of 41.2% for the financial sector, higher than the 34.0% weighting for the financial sectors of the Bank of America Merrill Lynch U.S. Corporate Index. Relative to the Barclay’s Aggregate, we are overweight in the commercial mortgage-backed securities asset class while having no exposure to the much larger residential mortgage-backed market.
 
At December 31, 2021, we had $4.164 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody’s and S&P. The portfolio is well diversified among approximately 1,700 municipal bond issuers. No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at year-end 2021.
 
Cincinnati Financial Corporation - 2021 10-K - Page 25


Equity Securities Investments
After covering both our intermediate and long-range insurance obligations with fixed-maturity investments, we historically have used some available cash flow to invest in equity securities. Our equity securities portfolio includes common stocks and nonredeemable preferred stocks. Investment in equity securities has played an important role in achieving our portfolio objectives and has contributed to both growth of investment income and portfolio appreciation. We remain committed to our long-term equity focus, which we believe is key to our company’s long-term growth and stability. We believe our strategy of primarily investing in a diversified selection of larger-capitalization, high-quality, dividend-increasing companies generally results in reduced volatility relative to the broader equity markets.
 
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 year-end 2021 consisted of a net gain position in our equity portfolio of $7.194 billion. Events or factors such as economic growth or recession can affect the fair value of our equity securities.

At year-end 2021, Apple Inc. (Nasdaq:AAPL) was our largest single common stock investment, comprising 7.9% of our publicly traded common stock portfolio and 3.5% of the entire investment portfolio. The parent company held 43.9% of our common stock holdings (measured by fair value). The distribution of the portfolio among industry sectors is shown in the table below.
 
Common Stock Portfolio Industry Sector Distribution
 Percent of common stock portfolio
 At December 31, 2021At December 31, 2020
 Cincinnati
Financial
S&P 500 Industry
Weightings
Cincinnati
Financial
S&P 500 Industry
Weightings
Sector:    
Information technology31.1 %29.2 %28.3 %27.6 %
Financial14.2 10.7 14.2 10.4 
Healthcare13.5 13.3 13.3 13.5 
Industrials11.1 7.8 12.3 8.4 
Consumer discretionary8.3 12.5 8.9 12.7 
Consumer staples6.9 5.9 6.7 6.5 
Materials4.4 2.5 5.1 2.6 
Energy4.0 2.7 3.8 2.3 
Real estate2.7 2.8 2.7 2.4 
Utilities2.2 2.5 2.6 2.8 
Telecomm services1.6 10.1 2.1 10.8 
Total100.0 %100.0 %100.0 %100.0 %
 
We evaluate nonredeemable preferred stocks in a manner similar to our evaluation of fixed-maturity investments, seeking attractive relative yields. We generally focus on investment-grade nonredeemable preferred stocks issued by companies with strong histories of paying common dividends, providing us with another layer of protection. Consideration is also given to nonredeemable preferred stocks that offer a dividend received deduction for income tax purposes. We purchased $173 million and $79 million of nonredeemable preferred stocks in this portfolio during 2021 and 2020, respectively.
Cincinnati Financial Corporation - 2021 10-K - Page 26


Other
What we report as Other includes the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. At year-end 2021, this subsidiary had $98 million in receivables related to its commercial leasing and financing services, compared with $95 million in receivables at year-end 2020.

We also report as Other the results of Cincinnati Re, which has contracts, also referred to as treaties, with other insurance or reinsurance companies to assume a portion of their insured risk in exchange for a portion of premiums from insurance policies covering those risks. The treaties and their exposure to losses are diverse in nature, including various lines of business and geographies for the reinsured risks. Some of our treaties reflect a type of contract commonly referred to as participating or proportional, typically sharing premiums and losses between the reinsured entity and us, as reinsurer, on a pro rata basis. Some are a contract type commonly referred to as excess of loss, where we indemnify the reinsured entity only for losses exceeding a predetermined amount.

Net written premiums for Cincinnati Re totaled $461 million in 2021, compared with $302 million in 2020. Approximately 32% of 2021 net written premiums was for property exposures that include risk of loss from natural catastrophes and approximately 55% was for casualty exposures from various liability risks. The remainder of approximately 13% was a combination of what we consider to be more specialized coverages that include, but are not limited to, credit risk transfer related to residential mortgages, marine and energy risks and cyber risks.

Also reported as Other are the results of Cincinnati Global, our London-based global specialty underwriter for Lloyd's Syndicate 318, which we acquired on February 28, 2019. We expect it to contribute to future earnings and book value growth. We also believe it should provide opportunities to support business produced by our independent agencies in new geographies and lines of business.

Net written premiums for Cincinnati Global totaled $187 million in 2021, compared with $177 million in 2020. Most of the 2021 premiums were for U.S. and international property exposures that include risk of loss from natural catastrophes, including approximately 65% classified as direct and facultative and 23% as binder, where binding authority has been granted to various coverholders. The coverholders are mostly in the U.S., and we believe they have the ability to successfully underwrite and manage risks. The remainder, approximately 12%, was for other classes of business that include trade credit, terrorism, specie coverage for high-value portable property and contingency insurance with coverage for film and entertainment risks or event cancellation.
Cincinnati Financial Corporation - 2021 10-K - Page 27


Regulation
The business of insurance in the United States (U.S.) is primarily regulated by state law. All of our U.S. insurance company subsidiaries are domiciled in the state of Ohio except The Cincinnati Specialty Underwriters Insurance Company, which is domiciled in the state of Delaware. Each domestic insurance subsidiary is primarily governed by the insurance laws and regulations in its respective state of domicile. We also are subject to regulatory authorities of all states in which we write insurance. The state laws and regulations that have the most significant effect on our insurance operations and financial reporting are discussed below.
Insurance Holding Company Regulation – We are regulated as an insurance holding company system in the respective states of domicile of our lead standard market property casualty company subsidiary and its surplus lines insurance subsidiary. These regulations require that we annually furnish financial and other information about the governance and operations of the individual companies within the holding company system. Information about the risks posed by any noninsurance company subsidiaries must also be disclosed. All transactions within a holding company system affecting insurers must be fair and equitable. Notice to the state insurance commissioner is required prior to the consummation of transactions affecting the ownership or control of an insurer and prior to certain material transactions between an insurer and any person or entity in its holding company group. In addition, some of those transactions cannot be consummated without the commissioner’s prior approval.
Subsidiary Dividends – The Cincinnati Insurance Company is fully owned by Cincinnati Financial Corporation. The dividend-paying capacity of The Cincinnati Insurance Company and its fully owned subsidiaries is regulated by the laws of the applicable state of domicile. Under these laws, our domestic insurance subsidiaries must provide a 10-day advance informational notice to the insurance commissioner for the domiciliary state prior to payment of any dividend or distribution to its shareholders. Generally, the most our domestic insurance subsidiary can pay without prior regulatory approval is the greater of 10% of statutory capital and surplus or 100% of statutory net income for the prior calendar year.
The domestic insurance company subsidiaries must give 30 days of notice to, and obtain prior approval from, the state insurance commissioner before the payment of an extraordinary dividend as defined by the state’s insurance code. You can find information about the dividends paid by our insurance subsidiary during 2021 in Item 8, Note 9 of the Consolidated Financial Statements.
Insurance Operations – All of our domestic insurance subsidiaries are subject to licensing and supervision by departments of insurance in the states in which they do business. The nature and extent of such regulations vary, but generally are rooted in statutes that delegate regulatory, supervisory and administrative powers to state insurance departments. Such regulations, supervision and administration of the domestic insurance subsidiaries include: the standards of solvency that must be met and maintained; the licensing of insurers and their agents and brokers; the nature and limitations on investments; deposits of securities for the benefit of policyholders; regulation of standard market policy forms and premium rates; policy cancellations and nonrenewals; test audit programs; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; requirements regarding reserves for unearned premiums, losses and other matters; the nature of and limitations on dividends to policyholders and shareholders; the nature and extent of required participation in insurance guaranty funds; the involuntary assumption of hard-to-place or high-risk insurance business, primarily workers’ compensation insurance; and the collection, remittance and reporting of certain taxes and fees. Our primary insurance regulators in the U.S. have adopted the Model Audit Rule for annual statutory financial reporting. This regulation closely mirrors the Sarbanes-Oxley Act on matters such as auditor independence, corporate governance and internal controls over financial reporting. The regulation permits the audit committee of Cincinnati Financial Corporation’s board of directors to also serve as the audit committee of each of our insurance subsidiaries for purposes of this regulation.
Insurance Guaranty Associations – For certain obligations of insolvent insurance companies to policyholders and claimants, states assess each member insurer in an amount relative to the insurer’s proportionate share of business written by all member insurers in the state. While the amount of such assessments has not been material in recent years, we cannot predict the amount and timing of any future assessments or refunds on our insurance subsidiaries under these laws.
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Shared Market and Joint Underwriting Plans – Assigned risk plans, reinsurance facilities and joint underwriting associations are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. States can require participation based upon the amount of an insurance company’s voluntary market share, and underwriting results related to these pools could be adverse to our company.
Statutory Accounting – For public reporting, domestic insurance companies prepare financial statements in accordance with GAAP. However, certain data also must be calculated according to statutory accounting rules as defined in the NAIC’s Accounting Practices and Procedures Manual. While not a substitute for any GAAP measure of performance, statutory data frequently is used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies.
Insurance Reserves – State insurance laws require that property casualty and life insurers annually analyze the adequacy of reserves. Our appointed actuaries must submit an opinion that reserves are adequate for policy claims-paying obligations and related expenses.
Investment Regulation – Insurance company investments must comply with laws and regulations pertaining to the type, quality and concentration of investments. Such laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and other qualifications.
Risk-Based Capital Requirements – The NAIC’s risk-based capital (RBC) requirements for property casualty and life insurers serve as an early warning tool for the NAIC and state regulators to identify companies that may be undercapitalized and may merit further regulatory action. The NAIC has a standard formula for annually assessing RBC. The formula for calculating RBC for property casualty companies takes into account asset and credit risks but places more emphasis on underwriting factors for reserving and pricing. The formula for calculating RBC for life insurance companies takes into account factors relating to insurance, business, asset and interest-rate risks.
Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal legislation and administrative rules adopted can affect our business. Privacy laws, such as the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act and the Health Insurance Portability and Accounting Act (HIPAA) are the federal laws that most affect our day-to-day operations. These apply to us because we gather and use personal nonpublic information to underwrite insurance and process claims. We also are subject to other federal laws, such as the Terrorism Risk Insurance Act (TRIA), anti-money laundering statute (AML), the Nonadmitted and Reinsurance Reform Act (NRRA), the U.S. Foreign Corrupt Practices Act (FCPA), and the rules and regulations of the Office of Foreign Assets Control (OFAC).

Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) created the Federal Insurance Office to monitor the insurance industry and gather information to identify issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry that affects the United States’ financial system and to recommend to the Financial Stability Oversight Council that it designate an insurer as a systemically significant entity requiring additional supervision by the Federal Reserve Board. We do not expect Dodd-Frank to result in federal oversight of our operations as a systemically significant entity.
 
We do not expect to have any material effects on our expenditures, earnings or competitive position as a result of compliance with any federal, state or local provisions enacted or adopted relating to the protection of the environment. We currently do not have any material estimated capital expenditures for environmental control facilities.
 
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We operate in limited foreign jurisdictions. Our foreign insurance subsidiary Cincinnati Global Underwriting Ltd., based in the United Kingdom (U.K.), holds a group of companies led by our managing agency, Cincinnati Global Underwriting Agency Ltd., of Lloyd’s Syndicate 318, which is regulated by The Prudential Regulation Authority (PRA) and The Financial Conduct Authority (FCA). The PRA’s primary objective with respect to insurers is to promote the safety and soundness of insurers for the protection of policyholders, while the FCA has three operational objectives: (i) to secure an appropriate degree of protection for consumers; (ii) to protect and enhance the integrity of the U.K. financial system; and (iii) to promote effective competition in the interests of consumers in the financial services markets. The PRA/FCA’s Senior Managers and Certification Regime provides regulatory frameworks for standards of fitness and propriety, conduct and accountability for individuals in positions of responsibility at insurers. The PRA and FCA have also delegated certain additional regulatory responsibilities to the Council of Lloyd’s. By virtue of Lloyd’s international licenses, we can write business in various countries throughout the world. In each such country, we are subject to the laws and insurance regulations of that jurisdiction.

Our operations in the U.K. are further subject to regulation by the European Union (EU). Generally, EU requirements are adopted by the EU and then implemented by enabling legislation in the member countries. Significant areas of oversight and influence from the EU include capital, solvency and risk management requirements (Solvency II), competition law and antitrust regulation, intermediary and distribution regulation, gender discrimination and data protection and privacy (General Data Protection Regulation). The applicability of EU regulation to our U.K. business is likely to change in ways yet to be fully determined as a result of the U.K.’s exit from the EU.
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Enterprise Risk Management
We manage enterprise risk through formal risk management programs overseen by an executive officer of the company. Our ERM framework includes an enterprise risk management committee, which is responsible for overseeing risk activities and is comprised of senior executive-level risk owners from across the enterprise. The risk committee's activities are supported by a team of representatives from business areas that focus on identifying, evaluating and developing risk plans for emerging risks. A comprehensive report is provided quarterly to our chairman, president and chief executive officer and also to our board of directors and our senior executive team, as appropriate, on the status of risk metrics relative to identified tolerances and limits, risk assessments and risk plans. The use of operational audits, strategic plans and departmental business plans, as well as our culture of open communications and fundamental respect for our Code of Conduct, continue to help us manage risks on an ongoing basis.

We understand that a cybersecurity incident is just one example of an event that could affect our future performance. We work to keep our systems and data secure while continuing to increase our understanding of cybersecurity risk through risk management efforts and testing by third-party experts of our cybersecurity program structure and capabilities. Those efforts include blocking attempted cyber intrusions, defending against denial of service attacks, performing frequent vulnerability assessments and maintaining procedures to ensure timely notification of critical cybersecurity incidents and related disclosure controls. We also have developed procedures and reporting processes when we identify an attempted cyber intrusion to the system of one of our independent agents. Cybersecurity matters are an important part of reporting to our executive management team, risk committee, disclosure committee and the board of directors, including its audit committee. Effects of cyberattacks can happen to any corporation and they can be significant, including additional costs for remediation, litigation and reputational damage.

Our risk management programs include a formalized risk appetite element and a risk identification and quantification process. The overall enterprise objective is to appropriately balance risk and reward to achieve an appropriate return on risk capital. Our key risks are discussed in Item 1A, Risk Factors, including risks related to natural catastrophes, investments and operations.

We continue to study emerging risks, including climate change risk and its potential financial effects on our results of operations and on those we insure. These effects include deterioration in the credit quality of our municipal or corporate bond portfolios and increased losses without sufficient corresponding increases in premiums. As with any risk, we seek to identify the extent of the risk exposure and possible actions to mitigate potential negative effects of risk at an enterprise level.

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ITEM 1A.   Risk Factors
Our business involves various risks and uncertainties that may affect achievement of our business objectives. Many of the risks could have ramifications across our organization. For example, while risks related to setting insurance rates and establishing and adjusting loss reserves are insurance activities, actual results differing from our assumptions, judgments or estimates in these areas could have an impact on our investment activities, growth and overall results.
 
The following discussion should be viewed as a starting point for understanding the significant risks we face. It is not a definitive summary of their potential impacts or of our strategies to manage and control the risks. Please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of those strategies.
 
If any risks or uncertainties discussed here develop into actual events, they could have a material adverse effect on our business, financial condition, results of operations or cash flows. In that case, the market price of our common stock could decline materially. The failure of our risk management strategies could have a material adverse impact on our consolidated financial condition, results of operations or cash flows.
 
Readers should carefully consider this information together with the other information we have provided in this report and in other reports and materials we file periodically with the Securities and Exchange Commission as well as news releases and other information we disseminate publicly.

Risks related to insurance operations

We rely primarily on independent insurance agents to distribute our products.
We market our main products, insurance policies for businesses and individuals, through independent, nonexclusive insurance agents. These agents are not obligated to promote our products and can and do sell our competitors’ products. We must offer insurance products that meet the needs of these agents and their clients. We need to maintain good relationships with the agents who market our products. If we do not, these agents may market our competitors’ products instead of ours, which may lead to us having a less desirable mix of business and could affect our results of operations.
 
In addition to our marketing of insurance policies for businesses and individuals, Cincinnati Re reinsures policies written by other insurance companies. This business is marketed through reinsurance intermediaries and is generally not offered by the typical independent agents who market our insurance policies.

Certain events or conditions could diminish our agents’ desire to produce business for us and the competitive advantage that our independent agents enjoy, including:
Downgrade of the financial strength ratings of our insurance subsidiaries. We believe our strong insurer financial strength ratings, in particular, the A+ (Superior) ratings from A.M. Best for our standard market property casualty insurance group and each subsidiary in that group, are an important competitive advantage. See Item 1, Our Business and Our Strategy, Financial Strength, for additional discussion of our financial strength ratings.
Concerns that doing business with us is difficult or not profitable, perceptions that our level of service is no longer a distinguishing characteristic in the marketplace, perceptions that our products do not meet the needs of our agents’ clients or perceptions that our business practices are not compatible with agents’ business models.
Mergers and acquisitions could result in a concentration of a significant amount of premium in one agency.
Delays in the development, implementation, performance and benefits of technology systems and enhancements or independent agent perceptions that our technology solutions do not match their needs.

A reduction in the number of independent agencies marketing our products, the failure of agencies to successfully market our products or pay amounts due to us, changes in the strategy or operations of agencies or the choice of agencies to reduce their writings of our products could affect our results of operations if we were unable to replace them with agencies that produce adequate and profitable premiums.
 
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Further, policyholders may choose a competitor’s product rather than our own because of real or perceived differences in price, terms and conditions, coverage or service. If the quality of the independent agencies with which we do business were to decline, that also might cause policyholders to purchase their insurance through different agencies or channels. Consumers, especially in the personal insurance industry segment, may increasingly choose to purchase insurance from distribution channels other than independent insurance agents, such as direct marketers. Increased advertising by insurers, especially direct marketers, could cause consumers to shift their buying habits, bypassing independent agents altogether. Innovation, new or changing technologies and/or buying trends or consumer preferences could reduce or eliminate the need or demand for products we sell.
 
Our credit ratings or financial strength ratings of our insurance subsidiaries could be downgraded.
A downgrade in one or more of our company’s credit or debt ratings could adversely impact our borrowing costs or limit our access to capital. Financial strength ratings reflect a rating agency’s opinion of our insurance subsidiaries’ financial strength, operating performance, strategic position and ability to meet obligations to policyholders. Our ratings are subject to periodic review and there is no assurance that our ratings will not be changed. Rating agencies could change or expand their requirements or could find that our insurance subsidiaries no longer meet the criteria established for current ratings. If our property casualty or life insurance subsidiary insurer financial strength ratings were to be downgraded, our agents might find it more difficult to market our products or might choose to emphasize the products of other carriers.
 
We could experience an unusually high level of losses due to catastrophic, terrorism or epidemic events or risk concentrations.
In the normal course of our business, both in our insurance and reinsurance operations, we provide coverage against perils for which estimates of losses are highly uncertain, in particular catastrophic and terrorism events. Catastrophes can be man-made or caused by natural perils. Man-made catastrophes to which we may be exposed include, but are not limited to, industrial accidents, terrorist attacks, social unrest and riot. Natural peril catastrophe events to which we may be exposed include, but are not limited to, hurricanes, tornadoes, windstorms, earthquakes, landslides, hailstorms, flooding, severe winter weather and wildfires. Due to the nature of these events, we are unable to predict precisely the frequency or potential cost of catastrophe occurrences. Various scientists and other experts believe that changing climate conditions have added to the unpredictability, frequency and severity of such natural disasters in certain parts of the world and have created additional uncertainty as to future trends and exposures. We cannot predict the impact that changing climate conditions may have on our results of operations nor can we predict how any legal, regulatory or social responses to concerns about climate change may impact our business. Additionally, man-made events, such as hydraulic fracturing, could cause damage from earth movement or create environmental and/or health hazards.
 
The extent of losses from a catastrophe is a function of both the total amount of insured and reinsured exposure in the area affected by the event and the severity of the event. Our ability to appropriately manage catastrophe risk depends partially on catastrophe models, which may be affected by inaccurate or incomplete data, the uncertainty of the frequency and severity of future events and the uncertain impact of climate change. Additionally, these models are recalibrated and changed over time, with more data availability and changing opinions regarding the effect of current or emerging loss patterns and conditions.

According to these models, probable maximum loss estimates from a single hurricane event that combine the effects of property casualty insurance written on a direct basis by The Cincinnati Insurance Companies, the Cincinnati Re reinsurance portfolio and risks insured by Cincinnati Global include the following amounts, net of amounts recoverable through reinsurance ceded and also income taxes, and including the effects of estimated reinstatement premiums: $428 million for a once-in-a-100-year event and $602 million for a once-in-a-250-year event. Please see Item 7, Liquidity and Capital Resources, 2022 Reinsurance Programs, for a discussion of modeled losses considered in evaluating our risk mitigation strategy, which includes our ceded reinsurance program.
 
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The geographic regions in which we market insurance and reinsurance are exposed to numerous natural catastrophes, such as:
Hurricanes in the gulf, eastern, southeastern and northeastern coastal regions.
Earthquakes in many regions, most particularly in the New Madrid fault zone, California, the Northwest and Southwest.
Tornadoes, wind and hail in the Midwest, South, Southeast, Southwest and the mid-Atlantic.
Wildfires.
On a worldwide basis, in the event of a severe catastrophic event or terrorist attack we may be exposed to material losses through our Cincinnati Re and Cincinnati Global operations.

The occurrence of terrorist attacks in the geographic areas we serve could result in substantially higher claims under our insurance policies than we have anticipated. Our insurance policies provide coverage for terrorism risk in all areas we serve, including Tier 1 and Tier 2 cities. We have exposure to small co-op utilities, water utilities, wholesale fuel distributors, small shopping malls and small colleges throughout our 46 active states and, because of the number of associates located there, our Fairfield, Ohio, headquarters. Additionally, our life insurance subsidiary could be adversely affected in the event of a terrorist event or an epidemic, particularly if the epidemic were to affect a broad range of the population, or affects the overall economy. Our associate health plan is self-funded and could similarly be affected.
 
Our results of operations would be adversely affected if the level of losses we experience over a period of time were to exceed our actuarially determined expectations. In addition, our financial condition may be adversely affected if we were required to sell securities prior to maturity or at unfavorable prices to pay an unusually high level of loss and loss expenses. Securities pricing might be even less favorable if a number of insurance or other companies and other investors needed to sell securities during a short period of time because of unusually high losses from catastrophic events.
 
Our geographic concentration ties our performance to business, economic, environmental and regulatory conditions in certain states. We market our standard market property casualty insurance products in 46 states, but our business is concentrated in the Midwest and Southeast. We also have exposure in states where we do not actively market insurance when clients of our independent agencies have businesses or properties in multiple states.
 
The Cincinnati Insurance Company continues to expand its Cincinnati Re reinsurance assumed operations and has staffed it with seasoned underwriting and analytical talent who strive to assume risks that we understand well, both quantitatively and qualitatively. Business written includes treaties that provide coverage for property catastrophe and terrorism events on a worldwide basis. Based on treaties in effect at January 1, 2022, the largest loss exposure to us for Cincinnati Re is from natural catastrophe events. That exposure includes probable maximum loss estimates, on a marginal basis, of the following amounts: $174 million for a once-in-a-100-year event and $167 million for a once-in-a-250-year event. Those effects represent a single hurricane event and include the effects of income taxes, estimated reinstatement premiums and applicable reinsurance ceded, including any retrocessions for reinsurance assumed, and estimated reinstatement premiums. They are based on probable maximum loss estimates from the Applied Insurance Research Touchstone® version 8.0 catastrophe model. The marginal basis reflects diversification effects of the Cincinnati Re reinsurance portfolio and property casualty insurance written on a direct basis by The Cincinnati Insurance Companies. Ignoring diversification effects provided by those two components, on a standalone basis, probable maximum loss estimates for Cincinnati Re include the following amounts: $201 million for a once-in-a-100-year event and $230 million for a once-in-a-250-year event. If there is a high frequency of large property catastrophe or terrorism events, or a single extreme event, during the coverage period of these treaties, our financial position and results of operations could be materially affected.

We are also expanding Cincinnati Global, our global specialty underwriter with premiums primarily for U.S. and international property exposures, given its seasoned underwriting talent. At January 1, 2022, the largest loss exposure to us for Cincinnati Global is from natural catastrophe events. That exposure includes probable maximum loss estimates of the following amounts: $49 million for a once-in-a-100-year event and $78 million for a once-in-a-250-year event. Those effects are on a standalone basis and represent a single hurricane event and include the effects of income taxes, applicable reinsurance ceded and estimated reinstatement premiums. They are
based on probable maximum loss estimates from the Applied Insurance Research Touchstone version 8.0 catastrophe model. If there is a high frequency of large property catastrophe or terrorism events, or a single extreme
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event, during the coverage period of its policies, our financial position and results of operations could be materially affected.

Additionally, the companies we invest in might be severely affected by a severe catastrophic event, terrorist attack, or epidemic event which could affect our financial condition and results of operations. Our reinsurers might experience significant losses, potentially jeopardizing their ability to pay losses we cede to them. It could also reduce the availability of reinsurance. If we cannot obtain adequate coverage at a reasonable cost, it could constrain where we can write business or reduce the amount of business we can write in certain areas. We also may be exposed to state guaranty fund assessments if other carriers in a state cannot meet their obligations to policyholders. A catastrophe or epidemic event also could affect our operations by damaging our headquarters facility, injuring associates and visitors at our Fairfield, Ohio, headquarters or disrupting our associates’ ability to perform their assigned tasks.
 
The outbreak of COVID-19 could result in an unusually high level of losses.
In March 2020, the outbreak of COVID-19, also known as the novel coronavirus SARS-CoV-2, was recognized as a pandemic by the World Health Organization. The outbreak was widespread in the United States, including in the markets in which we operate. Like many companies in the property casualty insurance industry, our 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. Risks to our business include legislation or court decisions that extend business interruption insurance in commercial property coverage forms to cover claims for pure economic loss related to the COVID-19 pandemic. Legislative initiatives and pending litigation are ongoing in numerous jurisdictions, and we cannot provide assurance that we will not be impacted by adverse legislation or adverse judicial rulings in certain of these jurisdictions. These actions seek to extend coverage beyond the terms and conditions we intended for those policies, including policies that do not contain specific virus exclusions. Therefore we could be forced to pay claims when no coverage was contemplated and for which no premium was collected. If these actions are successful, the aggregate amount of these claims could have a material, adverse impact on our business, financial condition, reputation, results of operations and cash flows.

Our net losses and loss adjustment expenses are estimates and actual net losses could be higher.
Our estimates for COVID-19 losses and loss adjustment expenses represent our best estimates as of December 31, 2021, based upon information currently available. These estimates are based on reported claims, policy level reviews and recent judicial rulings. However, assumptions about coverage, liability and reinsurance continue to be subject to on-going judicial review and may be subject to further government action. While we believe our net reserves for losses and loss adjustment expenses for COVID-19 as of December 31, 2021, are adequate based on information available at this time, we continue to closely monitor reported claims, government actions, judicial decisions and changes in the levels of worldwide social disruption and economic activity arising from the pandemic and will adjust our estimates of gross and net losses as new information becomes available. Factors that affect our estimates of losses and loss adjustment expenses or our ability to reasonably estimate such losses include the continuing duration of the pandemic and governmental actions to limit the spread of the virus that may produce additional economic losses; the number of policyholders that will ultimately submit claims or file lawsuits; the lack of submitted proofs of loss for allegedly covered claims; judicial rulings in similar litigation involving other companies in the insurance industry; difference in state law and developing case law; litigation trends, including varying legal theories advanced by policyholders; whether and to what degree any class of policyholders may be certified; and the inherent unpredictability of litigation. Such adjustments to our reserves for COVID-19 losses and loss adjustment expenses may be material to our results of operations, financial condition and cash flows.

Our ability to properly underwrite and price risks and increased competition could adversely affect our results.
Our financial condition, results of operations and cash flows depend on our ability to underwrite and set rates accurately for a full spectrum of risks. We establish our pricing based on assumptions about the level of losses that may occur within classes of business, geographic regions and other criteria.
 
To properly price our products, we must collect, properly analyze and use data to make decisions and take appropriate action; the data must be sufficient, reliable and accessible; we need to develop appropriate rating methodologies and formulae; and we may need to identify and respond to trends quickly. We may overestimate or underestimate loss cost trends or these trends may unexpectedly change, leading to losing business by pricing risks above our competitors or charging rates too low to maintain profitability. Inflation trends, especially outside of
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historical norms, may make it more difficult to determine adequate pricing. If rates are not accurate, we may not generate enough premiums to offset losses and expenses, or we may not be competitive in the marketplace.
 
Our ability to set appropriate rates could be hampered if states where we write business refuse to allow rate increases that we believe are necessary to cover the risks insured. A state could also hamper our ability to set appropriate rates if it no longer allowed us to use factors that we believe are predictive of loss, such as credit-based factors. Multiple states require us to purchase reinsurance from a mandatory reinsurance fund. Such reinsurance funds can create a credit risk for insurers if not adequately funded by the state and, in some cases, the existence of a reinsurance fund could affect the prices charged for our policies. The effect of these and similar arrangements could reduce our profitability in any given period or limit our ability to grow our business.
 
The insurance industry is cyclical and intensely competitive. From time to time, the industry goes through prolonged periods of intense competition during which it is more difficult to attract new business, retain existing business and maintain profitability. Competition in our insurance business is based on many factors, including:
Competitiveness of premiums charged
Relationships among carriers, agents, brokers and policyholders
Underwriting and pricing methodologies that allow insurers to identify and flexibly price risks
Compensation provided to agents
Underwriting discipline
Terms and conditions of insurance coverage
Speed with which products are brought to market
Product and marketing innovations, including advertising
Technological competence and innovation
Ability to control expenses
Adequacy of financial strength ratings by independent rating agencies such as A.M. Best
Quality of services and tools provided to agents and policyholders
Claims satisfaction and reputation

We compete with major U.S., Bermudian, European, and other international insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing and management resources than we do. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. We also compete with new companies that continue to enter the insurance and reinsurance markets. In addition, capital market participants have created alternative products that are intended to compete with reinsurance products that we sell through Cincinnati Re. Increased competition could result in fewer submissions, lower premium rates, and less favorable policy terms and conditions, which could reduce our underwriting margins and have a material adverse effect on our results of operations and financial condition.

If our pricing was incorrect or we were unable to compete effectively because of one or more of these factors, our premium writings could decline and our results of operations and financial condition could be materially adversely affected. Large competitors could intentionally disrupt the market by targeting certain lines or underpricing the market.
 
Please see the discussion of our Commercial Lines, Personal Lines, Excess and Surplus Lines and Life Insurance Segments in Item 1, Our Segments, for a discussion of our competitive position in the insurance marketplace.
 
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Our pricing and capital models could be flawed.  
We use various actuarial pricing methods, predictive pricing and underwriting models, stochastic models and/or forecasting techniques to help us understand our business, analyze risk and estimate future trends. The output of these techniques and models is used to assist us in making underwriting, pricing, reinsurance, reserving and capital decisions and helps us set our strategic direction. These models contain numerous assumptions, including the assumption that the data used is sufficient and accurate. They are also subject to uncertainties and limitations inherent in any statistical analysis. Actual results may be materially different from modeled output, resulting in pricing our products incorrectly, overestimating or underestimating reserves, or inaccurately forecasting the impact of modeled events on our results. This could materially adversely impact the results of our operations.
 
Our loss reserves, our largest liability, are based on estimates and could be inadequate to cover our actual losses.
Our consolidated financial statements are prepared using GAAP. These principles require us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates. For a discussion of the significant accounting policies we use to prepare our financial statements, the material implications of uncertainties associated with the methods, assumptions and estimates underlying our critical accounting policies and the process used to determine our loss reserves, please refer to Item 8, Note 1 of the Consolidated Financial Statements, and Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves and Life Insurance Policy Reserves.
 
Our most critical accounting estimate is loss reserves. Loss reserves are the amounts we expect to pay for covered claims and expenses we incur to settle those claims. The loss reserves we establish in our financial statements represent an estimate of amounts needed to pay and administer claims arising from insured events that have already occurred, including events that have not yet been reported to us. Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability. Inflationary scenarios, especially scenarios outside of historical norms or regulatory changes that affect the assumptions underlying our critical accounting estimates, may make it more difficult to estimate loss reserves. Accordingly, our loss reserves for past periods could prove to be inadequate to cover our actual losses and related expenses. Any changes in these estimates are reflected in our results of operations during the period in which the changes are made. An increase in our loss reserves would decrease earnings, while a decrease in our loss reserves would increase earnings.
 
Unforeseen losses, the type and magnitude of which we cannot predict, may emerge. These additional losses could arise from changes in the legal environment, laws and regulations, climate change, catastrophic events, increases in loss severity or frequency, environmental claims, mass torts or other causes such as social inflation. Such future losses could be substantial. Inflationary scenarios may cause the cost of claims, especially medical claims, to rise, impacting reserve adequacy and our results of operations.

In addition to the risks stated above, Cincinnati Re reserves are subject to uncertainty because a reinsurer relies on the original underwriting decisions and claims reserving practices of ceding companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition, there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of the loss. Similar risks exist for Cincinnati Global due to reliance on coverholders in underwriting parts of its business.

The anticipated benefits may not be realized for our acquisition of Cincinnati Global.
Cincinnati Global, our London-based global specialty underwriter for Lloyd's Syndicate 318, was acquired on February 28, 2019. We can provide no assurance that the anticipated benefits of the transaction will be fully realized in the time frame anticipated or at all, or that the costs or difficulties related to further developing its operations will not be greater than expected. The success of the transaction will depend, in part, on our ability to realize the anticipated business opportunities and growth prospects from acquiring Cincinnati Global. We may never realize these business opportunities and growth prospects, and our management might have its attention diverted while trying to further develop ongoing operations.

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Cincinnati Global’s international operations subject us to additional regulation and could expose us to additional investment, political and economic risks.
We have international operations that could expose us to a number of additional risks. These risks include restrictions such as price controls, capital controls, currency exchange limits, ownership limits and other restrictive or anti-competitive governmental actions or requirements, which could have an adverse effect on our business and reputation. Our business activities outside the United States, including the United Kingdom (U.K.), could also be subject to political and economic risks, including foreign currency and credit risk. Additionally, Cincinnati Global’s operations will expand the products offered by us and could expose us to additional regulation or other risks.
Additionally, business activities outside the United States will subject us to additional domestic and foreign laws and regulations, including the Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws in other countries that prohibit the making of improper payments to foreign officials. In addition, insurers in the U.K. (including managing agents and members of Lloyd’s of London) are subject to Solvency II and the U.K. regulatory regime, which itself includes rules promulgated by Lloyd's. Although we have policies and controls in place that are designed to ensure compliance with these laws and regulatory requirements, if those controls are ineffective and an employee or intermediary fails to comply with applicable laws and regulations, we could suffer civil and criminal penalties and our business and reputation could be adversely affected. Some countries have laws and regulations that lack clarity and, even with local expertise and effective controls, it can be difficult to determine the exact requirements of, and potential liability under, the local laws. Failure to comply with local laws in a particular market may result in substantial liability and could have a significant and negative effect not only on our business in that market but also on our reputation generally.

Business activities at Cincinnati Global are subject to Lloyd's approval of a business plan each year. There is risk that plans will not be approved or will be limited. As a Lloyd’s managing agent and syndicate, Cincinnati Global is exposed to various risks and the uncertainties associated, including its obligation to maintain funds at Lloyd’s to support its underwriting activities and periodic assessment of its capital, governance and other aspects of its business.

Developments relating to the United Kingdom’s leaving the European Union could adversely affect Cincinnati Global’s operations.
The terms of the U.K.’s withdrawal from the European Union (Brexit) and the relationship between the U.K. and the European Union going forward can affect economic conditions, including the terms of trade between them. The ultimate impact of Brexit is uncertain and will depend on any agreements that the U.K. makes to retain access to European Union markets. Brexit could also lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which European Union laws to replace or replicate. These or other adverse consequences from Brexit could adversely affect the operations and business opportunities of Cincinnati Global.

With a view to mitigating the potential effects of Brexit on business underwritten through it, Lloyd’s has set up an insurance company subsidiary in Belgium, with the intention of underwriting European Economic Area insurance business via that subsidiary. It is uncertain how effective Lloyd's proposed Brexit contingency plan will be.

Our ability to obtain or collect on our reinsurance protection could affect our business, financial condition, results of operations or cash flows.
We buy property casualty and life reinsurance coverage to mitigate the liquidity risk and earnings volatility risk of an unexpected rise in claims severity or frequency from catastrophic events or a single large loss. The availability, amount and cost of reinsurance depend on market conditions and may vary significantly. If we were unable to obtain reinsurance on acceptable terms and in appropriate amounts, our business and financial condition could be adversely affected.
 
In addition, we are subject to credit risk with respect to our reinsurers. Although we purchase rei