Published: 2022-07-27 00:00:00 ET

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The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned. These statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation.

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been condensed or omitted.

 

Our June 30, 2022, condensed consolidated financial statements are unaudited. We believe that we have made all adjustments, consisting only of normal recurring accruals, that are necessary for fair presentation. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our 2021 Annual Report on Form 10-K. The results of operations for interim periods do not necessarily indicate results to be expected for the full year.

The company continues to monitor the impact of the coronavirus (SARS-CoV-2 or COVID-19) pandemic outbreak. The company cannot predict the impact the pandemic will have on its future consolidated financial position, results of operations and cash flows, however the impact could be material.

Pending Accounting Updates

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. ASU 2018-12 requires changes to the measurement and disclosure of long-duration insurance contracts. In November 2020, the FASB issued an ASU that delayed the effective date of ASU 2018-12 to interim and annual reporting periods beginning after December 15, 2022. We plan to adopt these ASUs on a modified retrospective basis on January 1, 2023.

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

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

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The following table provides amortized cost, gross unrealized gains, gross unrealized losses and fair value for our fixed-maturity securities:

(Dollars in millions)						Amortized cost						Gross unrealized												Fair value
At June 30, 2022												gains						losses
Fixed maturity securities:
Corporate						$	7,167					$	60					$	424					$	6,803
States, municipalities and political subdivisions						4,845						38						229						4,654
Commercial mortgage-backed						256						—						7						249
United States government						146						—						2						144
Government-sponsored enterprises						60						—						—						60
Foreign government						23						—						—						23
Total						$	12,497					$	98					$	662					$	11,933
At December 31, 2021
Fixed maturity securities:
Corporate						$	7,043					$	467					$	13					$	7,497
States, municipalities and political subdivisions						4,768						330						3						5,095
Commercial mortgage-backed						264						9						—						273
United States government						121						2						—						123
Government-sponsored enterprises						8						—						—						8
Foreign government						26						—						—						26
Total						$	12,230					$	808					$	16					$	13,022

 

The net unrealized investment losses in our fixed-maturity portfolio at June 30, 2022, are primarily due to an increase in U.S. Treasury yields and a widening of corporate credit spreads. Our commercial mortgage-backed securities had an average rating of Aa2/AA- and Aa2/AA at June 30, 2022, and December 31, 2021, respectively.

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The table below provides fair values and gross unrealized losses by investment category and by the duration of the securities' continuous unrealized loss positions:

(Dollars in millions)						Less than 12 months												12 months or more												Total
At June 30, 2022						Fair value						Unrealized losses						Fair value						Unrealized losses						Fair value						Unrealized losses
Fixed maturity securities:
Corporate						$	4,768					$	398					$	107					$	26					$	4,875					$	424
States, municipalities and political subdivisions						2,341						223						20						6						2,361						229
Commercial mortgage-backed						237						7						10						—						247						7
United States government						85						2						11						—						96						2
Government-sponsored enterprises						36						—						3						—						39						—
Foreign government						16						—						—						—						16						—
Total						$	7,483					$	630					$	151					$	32					$	7,634					$	662
At December 31, 2021
Fixed maturity securities:
Corporate						$	861					$	13					$	15					$	—					$	876					$	13
States, municipalities and political subdivisions						105						2						2						1						107						3
Commercial mortgage-backed						10						—						11						—						21						—
United States government						48						—						—						—						48						—
Government-sponsored enterprises						7						—						—						—						7						—
Foreign government						16						—						—						—						16						—
Total						$	1,047					$	15					$	28					$	1					$	1,075					$	16

Contractual maturity dates for fixed-maturities securities were:

(Dollars in millions)						Amortized cost						Fair value						% of fair value
At June 30, 2022
Maturity dates:
Due in one year or less						$	645					$	645					5.4		%
Due after one year through five years						3,721						3,670						30.8
Due after five years through ten years						3,519						3,416						28.6
Due after ten years						4,612						4,202						35.2
Total						$	12,497					$	11,933					100.0		%

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

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

(Dollars in millions)			Three months ended June 30,												Six months ended June 30,
			2022						2021						2022						2021
Investment income:
Interest			$	124					$	117					$	247					$	235
Dividends			72						60						137						118
Other			2						1						3						3
Total			198						178						387						356
Less investment expenses			3						3						7						7
Total			$	195					$	175					$	380					$	349
Investment gains and losses, net:
Equity securities:
Investment gains and losses on securities sold, net			$	5					$	—					$	37					$	6
Unrealized gains and losses on securities still held, net			(1,175)						489						(1,882)						974
Subtotal			(1,170)						489						(1,845)						980
Fixed maturities:
Gross realized gains			2						11						6						14
Gross realized losses			(2)						(2)						(3)						(2)
Subtotal			—						9						3						12
Other			16						22						22						32
Total			$	(1,154)					$	520					$	(1,820)					$	1,024

 

The fair value of our equity portfolio was $9.510 billion and $11.315 billion at June 30, 2022, and December 31, 2021, respectively. At June 30, 2022, and December 31, 2021, Apple Inc. (Nasdaq:AAPL), an equity holding, was our largest single investment holding with a fair value of $664 million and $862 million, which was 7.3% and 7.9% of our publicly traded common equities portfolio and 3.1% and 3.5% of the total investment portfolio, respectively.

At June 30, 2022, and December 31, 2021, the allowance for credit losses, including changes in the amount during each period, was less than $1 million. During the three and six months ended June 30, 2022, there were one and two fixed-maturity securities, respectively, that were written down to fair value due to an intention to be sold resulting in impairment charges of less than $1 million for each period. During the three and six months ended June 30, 2021, there were no fixed-maturity securities that were written down to fair value due to an intention to be sold.

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In accordance with accounting guidance for fair value measurements and disclosures, we categorized our financial instruments, based on the priority of the observable and market-based data for the valuation technique used, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2021, and ultimately management determines fair value. See our 2021 Annual Report on Form 10-K, Item 8, Note 3, Fair Value Measurements, Page 137, for information on characteristics and valuation techniques used in determining fair value.

Fair Value Disclosures for Assets

The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at June 30, 2022, and December 31, 2021. We do not have any liabilities carried at fair value.

(Dollars in millions)						Quoted prices in active markets for identical assets (Level 1)						Significant other observable inputs (Level 2)						Significant unobservable inputs (Level 3)						Total
At June 30, 2022
Fixed maturities, available for sale:
Corporate						$	—					$	6,803					$	—					$	6,803
States, municipalities and political subdivisions						—						4,654						—						4,654
Commercial mortgage-backed						—						249						—						249
United States government						144						—						—						144
Government-sponsored enterprises						—						60						—						60
Foreign government						—						23						—						23
Subtotal						144						11,789						—						11,933
Common equities						9,092						—						—						9,092
Nonredeemable preferred equities						—						418						—						418
Separate accounts taxable fixed maturities						—						844						—						844
Top Hat savings plan mutual funds and common    equity (included in Other assets)						60						—						—						60
Total						$	9,296					$	13,051					$	—					$	22,347
At December 31, 2021
Fixed maturities, available for sale:
Corporate						$	—					$	7,497					$	—					$	7,497
States, municipalities and political subdivisions						—						5,095						—						5,095
Commercial mortgage-backed						—						273						—						273
United States government						123						—						—						123
Government-sponsored enterprises						—						8						—						8
Foreign government						—						26						—						26
Subtotal						123						12,899						—						13,022
Common equities						10,862						—						—						10,862
Nonredeemable preferred equities						—						453						—						453
Separate accounts taxable fixed maturities						—						948						—						948
Top Hat savings plan mutual funds and common   equity (included in Other assets)						64						—						—						64
Total						$	11,049					$	14,300					$	—					$	25,349

 

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We also held Level 1 cash and cash equivalents of $1.098 billion and $1.139 billion at June 30, 2022, and December 31, 2021, respectively.

Fair Value Disclosures for Assets and Liabilities Not Carried at Fair Value 

The disclosures below are presented to provide information about the effects of current market conditions on financial instruments that are not reported at fair value in our condensed consolidated financial statements.

 

This table summarizes the book value and principal amounts of our long-term debt:

(Dollars in millions)																		Book value												Principal amount
Interest rate						Year of  issue												June 30,						December 31,						June 30,						December 31,
																		2022						2021						2022						2021
6.900%						1998						Senior debentures, due 2028						$	27					$	27					$	28					$	28
6.920%						2005						Senior debentures, due 2028						391						391						391						391
6.125%						2004						Senior notes, due 2034						371						371						374						374
Total																		$	789					$	789					$	793					$	793

 

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

(Dollars in millions)						Quoted prices in active markets for identical assets (Level 1)						Significant other observable inputs (Level 2)						Significant unobservable inputs (Level 3)						Total
At June 30, 2022
Note payable						$	—					$	44					$	—					$	44
6.900% senior debentures, due 2028						—						31						—						31
6.920% senior debentures, due 2028						—						443						—						443
6.125% senior notes, due 2034						—						426						—						426
Total						$	—					$	944					$	—					$	944
At December 31, 2021
Note payable						$	—					$	54					$	—					$	54
6.900% senior debentures, due 2028						—						34						—						34
6.920% senior debentures, due 2028						—						501						—						501
6.125% senior notes, due 2034						—						510						—						510
Total						$	—					$	1,099					$	—					$	1,099

 

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The following table shows the fair value of our life policy loans included in other invested assets and the fair values of our deferred annuities and structured settlements included in life policy and investment contract reserves:

(Dollars in millions)						Quoted prices in active markets for identical assets (Level 1)						Significant other observable inputs (Level 2)						Significant unobservable inputs (Level 3)						Total
At June 30, 2022
Life policy loans						$	—					$	—					$	39					$	39
Deferred annuities						—						—						649						649
Structured settlements						—						155						—						155
Total						$	—					$	155					$	649					$	804
At December 31, 2021
Life policy loans						$	—					$	—					$	44					$	44
Deferred annuities						—						—						778						778
Structured settlements						—						201						—						201
Total						$	—					$	201					$	778					$	979

 

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

 

Recorded reserves for the deferred annuities were $755 million and $762 million at June 30, 2022, and December 31, 2021, respectively. Recorded reserves for the structured settlements were $133 million and $136 million at June 30, 2022, and December 31, 2021, respectively.

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This table summarizes activity for our consolidated property casualty loss and loss expense reserves:

(Dollars in millions)						Three months ended June 30,												Six months ended June 30,
						2022						2021						2022						2021
Gross loss and loss expense reserves, beginning of period						$	7,287					$	6,880					$	7,229					$	6,677
Less reinsurance recoverable						319						262						327						277
Net loss and loss expense reserves, beginning of period						6,968						6,618						6,902						6,400
Net incurred loss and loss expenses related to:
Current accident year						1,299						949						2,296						1,982
Prior accident years						(59)						(119)						(100)						(229)
Total incurred						1,240						830						2,196						1,753
Net paid loss and loss expenses related to:
Current accident year						368						334						537						477
Prior accident years						524						433						1,245						995
Total paid						892						767						1,782						1,472
Net loss and loss expense reserves, end of period						7,316						6,681						7,316						6,681
Plus reinsurance recoverable						287						274						287						274
Gross loss and loss expense reserves, end of period						$	7,603					$	6,955					$	7,603					$	6,955

 

We use actuarial methods, models and judgment to estimate, as of a financial statement date, the property casualty loss and loss expense reserves required to pay for and settle all outstanding insured claims, including incurred but not reported (IBNR) claims, as of that date. The actuarial estimate is subject to review and adjustment by an inter-departmental committee that includes actuarial, claims, underwriting, loss prevention and accounting management. This committee is familiar with relevant company and industry business, claims and underwriting trends, as well as general economic and legal trends that could affect future loss and loss expense payments. The amount we will actually have to pay for claims can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. The reserve for loss and loss expenses in the condensed consolidated balance sheets also included $66 million at June 30, 2022, and $64 million at June 30, 2021, for certain life and health loss and loss expense reserves.

For the three months ended June 30, 2022, we experienced $59 million of favorable development on prior accident years, including $29 million of favorable development in commercial lines, $14 million of favorable development in personal lines and $1 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $18 million for the workers' compensation line and $7 million for the commercial property line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal lines, we recognized favorable reserve development of $16 million for the homeowner line.

For the six months ended June 30, 2022, we experienced $100 million of favorable development on prior accident years, including $47 million of favorable development in commercial lines, $48 million of favorable development in personal lines and $6 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $27 million for the workers' compensation line and $12 million for the commercial property line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal lines, we recognized favorable reserve development of $46 million for the homeowner line.

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For the three months ended June 30, 2021, we experienced $119 million of favorable development on prior accident years, including $86 million of favorable development in commercial lines, $12 million of favorable development in personal lines and $1 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable reserve development of $27 million for the workers' compensation line and $26 million for the commercial casualty line due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal lines, we recognized favorable reserve development of $9 million in personal auto.

For the six months ended June 30, 2021, we experienced $229 million of favorable development on prior accident

years, including $169 million of favorable development in commercial lines, $32 million of favorable development in

personal lines and $3 million of unfavorable development in excess and surplus lines. Within commercial lines, we

recognized favorable reserve development of $52 million for the workers' compensation line, $37 million for the

commercial auto line, $34 million for the commercial property line and $32 million for the commercial casualty line

due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Within personal

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

 

We establish reserves for the company's deferred annuity, universal life and structured settlement policies equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life policies contain no-lapse guarantee provisions. For these policies, we establish a reserve in addition to the account balance, based on expected no-lapse guarantee benefits and expected policy assessments.

This table summarizes our life policy and investment contract reserves:

(Dollars in millions)						June 30, 2022						December 31, 2021
Life policy reserves:
Ordinary/traditional life						$	1,414					$	1,376
Other						52						52
Subtotal						1,466						1,428
Investment contract reserves:
Deferred annuities						755						762
Universal life						679						679
Structured settlements						133						136
Other						8						9
Subtotal						1,575						1,586
Total life policy and investment contract reserves						$	3,041					$	3,014

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Expenses directly related to successfully acquired insurance policies – primarily commissions, premium taxes and underwriting costs – are deferred and amortized over the terms of the policies. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate the costs for recoverability. The table below shows the deferred policy acquisition costs and asset reconciliation.

(Dollars in millions)			Three months ended June 30,												Six months ended June 30,
			2022						2021						2022						2021
Property casualty:
Deferred policy acquisition costs asset, beginning of period			$	665					$	586					$	602					$	542
Capitalized deferred policy acquisition costs			375						325						739						637
Amortized deferred policy acquisition costs			(317)						(281)						(618)						(549)
Deferred policy acquisition costs asset, end of period			$	723					$	630					$	723					$	630
Life:
Deferred policy acquisition costs asset, beginning of period			$	314					$	294					$	303					$	263
Capitalized deferred policy acquisition costs			15						15						30						29
Amortized deferred policy acquisition costs			(11)						(14)						(21)						(23)
Shadow deferred policy acquisition costs			4						(1)						10						25
Deferred policy acquisition costs asset, end of period			$	322					$	294					$	322					$	294
Consolidated:
Deferred policy acquisition costs asset, beginning of period			$	979					$	880					$	905					$	805
Capitalized deferred policy acquisition costs			390						340						769						666
Amortized deferred policy acquisition costs			(328)						(295)						(639)						(572)
Shadow deferred policy acquisition costs			4						(1)						10						25
Deferred policy acquisition costs asset, end of period			$	1,045					$	924					$	1,045					$	924

No premium deficiencies were recorded in the condensed consolidated statements of income, as the sum of the anticipated loss and loss expenses, policyholder dividends and unamortized deferred acquisition expenses did not exceed the related unearned premiums and anticipated investment income.

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

(Dollars in millions)						Three months ended June 30,
						2022																					2021
						Before tax						Income tax						Net									Before tax						Income tax						Net
Investments:
AOCI, beginning of period						$	46					$	8					$	38								$	830					$	174					$	656
OCI before investment gains and losses, net, recognized in net income						(610)						(127)						(483)									141						28						113
Investment gains and losses, net, recognized in net income						—						—						—									(9)						(1)						(8)
OCI						(610)						(127)						(483)									132						27						105
AOCI, end of period						$	(564)					$	(119)					$	(445)								$	962					$	201					$	761
Pension obligations:
AOCI, beginning of period						$	27					$	7					$	20								$	(37)					$	(6)					$	(31)
OCI excluding amortization recognized in net income						—						—						—									—						—						—
Amortization recognized in net income						—						—						—									1						—						1
OCI						—						—						—									1						—						1
AOCI, end of period						$	27					$	7					$	20								$	(36)					$	(6)					$	(30)
Life deferred acquisition costs, life policy reserves and other:
AOCI, beginning of period						$	1					$	—					$	1								$	—					$	—					$	—
OCI before investment gains and losses, net, recognized in net income						1						—						1									—						—						—
Investment gains and losses, net, recognized in net income						—						—						—									—						—						—
OCI						1						—						1									—						—						—
AOCI, end of period						$	2					$	—					$	2								$	—					$	—					$	—
Summary of AOCI:
AOCI, beginning of period						$	74					$	15					$	59								$	793					$	168					$	625
Investments OCI						(610)						(127)						(483)									132						27						105
Pension obligations OCI						—						—						—									1						—						1
Life deferred acquisition costs, life policy reserves and other OCI						1						—						1									—						—						—
Total OCI						(609)						(127)						(482)									133						27						106
AOCI, end of period						$	(535)					$	(112)					$	(423)								$	926					$	195					$	731

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Primary components of our property casualty reinsurance assumed operations include involuntary and voluntary assumed as well as contracts from our reinsurance assumed operations, known as Cincinnati Re. Primary components of our ceded reinsurance include a property per risk treaty, property excess treaty, casualty per occurrence treaty, casualty excess treaty, property catastrophe treaty and catastrophe bonds and retrocessions on our reinsurance assumed operations. Management’s decisions about the appropriate level of risk retention are affected by various factors, including changes in our underwriting practices, capacity to retain risks and reinsurance market conditions.

The table below summarizes our consolidated property casualty insurance net written premiums, earned premiums and incurred loss and loss expenses:

(Dollars in millions)						Three months ended June 30,												Six months ended June 30,
						2022						2021						2022						2021
Direct written premiums						$	1,871					$	1,649					$	3,574					$	3,194
Assumed written premiums						193						161						456						366
Ceded written premiums						(100)						(96)						(167)						(153)
Net written premiums						$	1,964					$	1,714					$	3,863					$	3,407
Direct earned premiums						$	1,631					$	1,465					$	3,192					$	2,894
Assumed earned premiums						134						109						255						210
Ceded earned premiums						(68)						(60)						(132)						(115)
Earned premiums						$	1,697					$	1,514					$	3,315					$	2,989
Direct incurred loss and loss expenses						$	1,174					$	781					$	2,069					$	1,649
Assumed incurred loss and loss expenses						67						54						140						132
Ceded incurred loss and loss expenses						(1)						(5)						(13)						(28)
Incurred loss and loss expenses						$	1,240					$	830					$	2,196					$	1,753

Our life insurance company purchases reinsurance for protection of a portion of the risks that are written. Primary components of our life reinsurance program include individual mortality coverage, aggregate catastrophe and accidental death coverage in excess of certain deductibles.

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

(Dollars in millions)						Three months ended June 30,												Six months ended June 30,
						2022						2021						2022						2021
Direct earned premiums						$	96					$	98					$	186					$	185
Ceded earned premiums						(20)						(19)						(38)						(37)
Earned premiums						$	76					$	79					$	148					$	148
Direct contract holders' benefits incurred						91						100						205						207
Ceded contract holders' benefits incurred						(22)						(15)						(53)						(42)
Contract holders' benefits incurred						$	69					$	85					$	152					$	165

 

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

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The differences between the 21% statutory federal income tax rate and our effective income tax rate were as follows:

(Dollars in millions)						Three months ended June 30,																								Six months ended June 30,
						2022												2021												2022												2021
Tax at statutory rate:						$	(218)					21.0		%				$	183					21.0		%				$	(294)					21.0		%				$	344					21.0		%
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds						(5)						0.5						(5)						(0.6)						(10)						0.7						(10)						(0.6)
Dividend received exclusion						(5)						0.5						(4)						(0.5)						(10)						0.7						(9)						(0.5)
Other						(5)						0.4						(5)						(0.5)						(6)						0.4						(8)						(0.6)
Provision (benefit) for income taxes						$	(233)					22.4		%				$	169					19.4		%				$	(320)					22.8		%				$	317					19.3		%

 

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

We continue to believe that after considering all positive and negative evidence of taxable income in the carryback and carryforward periods as permitted by law, it is more likely than not that all of the deferred tax assets on our U.S. domestic operations will be realized. As a result, we have no valuation allowance for our U.S. domestic operations at June 30, 2022, and December 31, 2021. As more fully discussed below, we do carry a valuation allowance on the deferred tax assets related to Cincinnati Global Underwriting Ltd.SM (Cincinnati Global).

Unrecognized Tax Benefits

At June 30, 2022, and December 31, 2021, we had a gross unrecognized tax benefit of $34 million. There were no changes to this amount during the first half of 2022. It is reasonably possible that within the next 12 months, our unrecognized tax benefit could change when the IRS completes its examination of the tax year ended December 31, 2018.

Cincinnati Global

As a result of operations for the three and six months ended June 30, 2022, Cincinnati Global decreased its net deferred tax assets by $8 million and $11 million with an offsetting decrease of $8 million and $11 million to the valuation allowance. At June 30, 2022, Cincinnati Global had a net deferred tax asset of $42 million and an offsetting valuation allowance of $42 million.

Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred tax assets will not be realized. After considering all positive and negative evidence, we continue to believe it is appropriate to carry a valuation allowance at June 30, 2022.

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

(In millions, except per share data)						Three months ended June 30,												Six months ended June 30,
						2022						2021						2022						2021
Numerator:
Net income (loss)—basic and diluted						$	(808)					$	703					$	(1,081)					$	1,323
Denominator:
Basic weighted-average common shares outstanding						159.6						161.1						160.0						161.1
Effect of share-based awards:
Stock options						—						1.2						—						1.0
Nonvested shares						—						0.6						—						0.6
Diluted weighted-average shares						159.6						162.9						160.0						162.7
Earnings (loss) per share:
Basic						$	(5.06)					$	4.36					$	(6.76)					$	8.21
Diluted						$	(5.06)					$	4.31					$	(6.76)					$	8.13
Number of anti-dilutive share-based awards						2.0						0.4						2.2						1.0

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

(Dollars in millions)						Three months ended June 30,												Six months ended June 30,
						2022						2021						2022						2021
Service cost						$	3					$	3					$	5					$	5
Non-service (benefit) costs:
Interest cost						2						3						5						5
Expected return on plan assets						(5)						(6)						(11)						(11)
Amortization of actuarial loss and prior service cost						—						1						—						3
Other						—						—						—						2
Total non-service benefit						(3)						(2)						(6)						(1)
Net periodic (benefit) cost						$	—					$	1					$	(1)					$	4

See our 2021 Annual Report on Form 10-K, Item 8, Note 13, Employee Retirement Benefits, Page 162, for information on our retirement benefits. The net periodic (benefit) cost is allocated in the same proportion primarily to the underwriting, acquisition and insurance expenses line item with the remainder allocated to the insurance losses and contract holders' benefits line item on the condensed consolidated statements of income for both 2022 and 2021.

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

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

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

In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present a number of uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any class may be certified, and the size and scope of any such classes. The legal theories advanced by plaintiffs vary by case as do the state laws that govern the policy interpretation. These lawsuits are at various stages of litigation: a few filed in 2022, including several that continue to be amended; several that have been dismissed voluntarily and may be refiled; and others that have been dismissed by trial courts and appealed. While appellate decisions issued to date generally have been favorable for the insurance industry and the company, many remain to be decided. In some jurisdictions, many cases have been stayed pending appellate decisions in their state or federal circuit. Accordingly, little discovery has occurred on pending cases. In addition, business income calculations depend upon a wide range of factors that are particular to the circumstances of each individual policyholder and, here, virtually none of the plaintiffs have submitted proofs of loss or otherwise quantified or factually supported any allegedly covered loss. Moreover, the company’s experience shows that demands for damages often bear little relation to a reasonable estimate of potential loss. Accordingly, management cannot now reasonably estimate the possible loss or range of loss, if any. Nonetheless, given the number of claims and potential claims, the indeterminate amounts sought, and the inherent unpredictability of litigation, it is possible that adverse outcomes, if any, in the aggregate could have a material adverse effect on the company’s consolidated financial position, results of operations and cash flows.

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

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insurance subsidiaries also are occasionally parties to individual actions in which extra-contractual damages, punitive damages or penalties are sought, such as claims alleging bad faith handling of insurance claims or writing unauthorized coverage or claims alleging discrimination by former or current associates.

On a quarterly basis, we review these outstanding matters. Under current accounting guidance, we establish accruals when it is probable that a loss has been incurred and we can reasonably estimate its potential exposure. The company accounts for such probable and estimable losses, if any, through the establishment of legal expense reserves. Based on our quarterly review, we believe that our accruals for probable and estimable losses are reasonable and that the amounts accrued do not have a material effect on our consolidated financial position, results of operations and cash flows. However, if any one or more of these matters results in a judgment against us or settlement for an amount that is significantly greater than the amount accrued, the resulting liability could have a material effect on the company’s consolidated financial position, results of operations and cash flows. Based on our most recent review, our estimate for any other matters for which the risk of loss is not probable, but more than remote, is immaterial.

We operate primarily in two industries, property casualty insurance and life insurance. Our chief operating decision maker regularly reviews our reporting segments to make decisions about allocating resources and assessing performance. Our reporting segments are:

•Commercial lines insurance

•Personal lines insurance

•Excess and surplus lines insurance

•Life insurance

•Investments

We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. We also report as Other the underwriting results of Cincinnati Re and Cincinnati Global. See our 2021 Annual Report on Form 10-K, Item 8, Note 18, Segment Information, Page 172, for a description of revenue, income or loss before income taxes and identifiable assets for each of the five segments.

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Segment information is summarized in the following table: 

(Dollars in millions)						Three months ended June 30,												Six months ended June 30,
						2022						2021						2022						2021
Revenues:
Commercial lines insurance
Commercial casualty						$	350					$	312					$	686					$	615
Commercial property						280						259						554						512
Commercial auto						210						198						415						391
Workers' compensation						68						68						136						135
Other commercial						86						74						165						144
Commercial lines insurance premiums						994						911						1,956						1,797
Fee revenues						1						1						2						2
Total commercial lines insurance						995						912						1,958						1,799
Personal lines insurance
Personal auto						155						152						307						305
Homeowner						202						178						397						352
Other personal						56						52						111						101
Personal lines insurance premiums						413						382						815						758
Fee revenues						1						1						2						2
Total personal lines insurance						414						383						817						760
Excess and surplus lines insurance						124						95						236						184
Fee revenues						—						1						1						1
Total excess and surplus lines insurance						124						96						237						185
Life insurance premiums						76						79						148						148
Fee revenues						1						1						2						2
Total life insurance						77						80						150						150
Investments
Investment income, net of expenses						195						175						380						349
Investment gains and losses, net						(1,154)						520						(1,820)						1,024
Total investment revenue						(959)						695						(1,440)						1,373
Other
Premiums						166						126						308						250
Other						3						3						5						5
Total other revenues						169						129						313						255
Total revenues						$	820					$	2,295					$	2,035					$	4,522
Income (loss) before income taxes:
Insurance underwriting results
Commercial lines insurance						$	(62)					$	145					$	14					$	275
Personal lines insurance						(49)						29						16						26
Excess and surplus lines insurance						19						10						35						18
Life insurance						13						(2)						11						(4)
Investments						(987)						668						(1,495)						1,320
Other						25						22						18						5
Total income (loss) before income taxes						$	(1,041)					$	872					$	(1,401)					$	1,640

Identifiable assets:						June 30, 2022						December 31, 2021
Property casualty insurance						$	4,945					$	4,421
Life insurance						1,486						1,590
Investments						21,590						24,481
Other						1,171						895
Total						$	29,192					$	31,387

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