CINCINNATI FINANCIAL CORP

Our value creation ratio, defined above, is our primary performance target. VCR trends are shown in the table below.

We are targeting an annual value creation ratio averaging 10% to 13% over the next five-year period. At 19.5% for 2023, our performance was above the high end of that range. It was within the range for the three-year period and above the high end of the range for the five-year period, both that ended in December 2023.

The table below shows the primary contributors of our value creation ratio on a percentage basis. Analysis of the contributors aids understanding of our financial performance. Our financial results are further analyzed in the Corporate Financial Highlights section below.

The 2023 value creation ratio improved by 34.1 percentage points, compared with 2022, and again included a significant contribution from operating results, as shown in the table above, that was 3.9 percentage-points higher than last year. The 2023 ratio improvement was primarily due to a higher valuation for our investment portfolio, with increases of 17.9 percentage-points from our equity securities investment portfolio and 12.0 points from our fixed-maturity securities investment portfolio. The decrease in 2022, compared with 2021, was primarily due to a reduction in overall net gains from our investment portfolio.

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We believe our value creation ratio is a useful measure. The table below shows calculations for VCR.

• Book value per share is calculated by dividing end of period total shareholders' equity by end of period shares outstanding

** Change in book value divided by the beginning of year book value

*** Dividend declared to shareholders divided by beginning of year book value

When looking at our longer-term objectives, we see three primary performance drivers for our value creation ratio:

•Premium growth – We believe over any five-year period our agency relationships and initiatives can lead to a property casualty written premium growth rate that exceeds the industry average. The compound annual growth rate of our net written premiums was 9.9% over the five-year period 2019 through 2023, exceeding the 6.9% estimated growth rate for the property casualty insurance industry, with 2023 representing industry data reported through the first nine months of 2023. The industry’s growth rate excludes its mortgage and financial guaranty lines of business.

•Combined ratio – We believe our underwriting philosophy and initiatives can drive performance to achieve our underwriting profitability target of a GAAP combined ratio over any five-year period that consistently averages within the range of 92% to 98% in the future, better than our target of 95% to 100% during 2012 through 2023. We changed the target because we believe we can continue to perform at a high level. Our GAAP combined ratio averaged 94.6% over the five-year period 2019 through 2023, slightly better than the performance target range for that period. Performance as measured by the combined ratio is discussed in Consolidated Property Casualty Insurance Results. Our statutory combined ratio averaged 94.1% over the five-year period 2019 through 2023, compared with an estimated 101.1% for the property casualty industry, with 2023 representing industry data reported through the first nine months of 2023. The industry’s ratio again excludes its mortgage and financial guaranty lines of business.

•Investment contribution – We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year total return of the S&P 500 Index.

◦Investment income growth, on a pretax basis, had a compound annual growth rate of 7.6% over the five-year period 2019 through 2023.

◦Over the five years ended December 31, 2023, our equity portfolio compound annual total return was 15.0% compared with a compound annual total return of 15.7% for the Index. Our equity portfolio favors larger-capitalization, high-quality, dividend-growing stocks with a slight value orientation. For the year 2023, our equity portfolio total return was 15.2%, compared with 26.3% for the Index.

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The board of directors is committed to rewarding shareholders directly through cash dividends and share repurchase authorizations. Through 2023, the company has increased the annual cash dividend rate for 63 consecutive years, a record we believe is matched by only seven other publicly traded U.S. companies. In addition to regular dividends, strong capital and excellent company performance has provided opportunities to further reward shareholders. The board regularly evaluates relevant factors in dividend-related decisions, and the 2023 increase to the regular dividend reflected confidence in our outstanding capital, liquidity and financial flexibility, as well as progress of our initiatives to improve earnings performance while growing insurance premium revenues. We discuss our financial position in more detail in Liquidity and Capital Resources.

Our view of the shareholder value we can create over the next five years relies largely on three assumptions – each highly dependent on the external environment. First, we anticipate our property casualty average insurance prices will increase in proportion to, or in excess of, our loss cost trends. Second, we assume that the economy can maintain a long-term growth track. Third, we assume that valuations of our marketable securities will vary within a typical range over time, based on historical trends. If those assumptions prove to be inaccurate, we may not be able to achieve our performance targets even if we accomplish our strategic objectives.

We discuss in Item 1A, Risk Factors, many potential risks to our business and our ability to achieve our qualitative and quantitative objectives.

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Corporate Financial Highlights

In addition to the value creation ratio discussion and analysis in the Executive Summary, we further analyze our financial results in the sections below.

Balance Sheet Data

Total investments increased by 13% during 2023 on a fair value basis, and included an increase in our securities portfolio valuation that added to an 8% increase in its cost basis. Entering 2024, we believe the portfolio continues to be well diversified and is well positioned to withstand short-term fluctuations. We discuss our investment strategy in Item 1, Investments Segment, and results for the segment in Investments Results. Total assets increased by 10%, compared with year-end 2022. Shareholders’ equity increased by 15% and book value per share also increased by 15%, for reasons discussed in the preceding Executive Summary.

The amount of our debt obligations decreased by $24 million in 2023, compared with 2022. Our 6.3% ratio of debt to total capital (debt plus shareholders’ equity) at year-end 2023 decreased by 1.1 percentage points compared with the prior-year ratio.

Income Statement and Per Share Data

Net income rose by $2.330 billion in 2023, compared with net a net loss for 2022, including a $2.050 billion increase in net investment gains on an after-tax basis. The improved 2023 net income also included an increase in property casualty underwriting income of $206 million after taxes, as discussed below, and a $91 million increase in investment income after taxes. Our investment operation’s performance is discussed further in Investments Results. A net loss of $487 million in 2022, representing a $3.455 billion decrease compared with net income for 2021, included a $3.062 billion reduction in net investment gains after taxes. The reduced 2022 net income also included a decrease in property casualty underwriting income of $467 million after taxes and a $55 million increase in investment income after taxes.

During 2021 through 2023, SARS-CoV-2, also known as COVID-19 and recognized as a pandemic by the World Health Organization, continued to cause various effects in parts of the world. We believe it did not have a significant effect on our premium or investment revenues during 2023, 2022 or 2021. For future periods, renewal premium or new business premium amounts could decline due to reduced spending by businesses or consumers,

Cincinnati Financial Corporation - 2023 10-K - Page 51 or if the basis for policy premiums, such as sales and payrolls of businesses we insure, decrease as a result of a weakening economy, pandemic or other reasons. Premium growth by segment is discussed below in Financial Results.

During 2023, 2022 and 2021, there were no material changes to our estimates for incurred losses and expenses related to the pandemic. Factors used in estimating reserves for business interruption legal expenses related to the pandemic included estimates for attorney fees associated with the defense of such lawsuits filed against the company; litigation trends of such cases, including responding to amended and replead cases and cases on appeal; and trends in judicial decisions in cases filed against the company and other insurers. Loss experience for our insurance operations is influenced by many factors, as discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves. Because of various factors that affect exposure to certain insurance losses, such as less miles driven for vehicles or reduced sales and payrolls for businesses, there could be a reduction in future losses, and in some cases a generally corresponding reduction in premiums. Also, there could be losses or legal expenses that increase or otherwise occur independently of changes in the economy or changes in sales or payrolls of businesses we insure, due to inflation, pandemic effects or other factors.

Contribution from Insurance Operations

Property casualty net written premiums grew 10% and earned premiums also grew 10% in 2023. The growth reflected average renewal price increases, premium growth initiatives and a higher level of insured exposures, including a contribution to net written premium growth of less than 1 percentage point from Cincinnati Re and Cincinnati Global in total. Growth in 2022 net written premiums and earned premiums was driven by factors similar to 2023. Trends and related factors are discussed in Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance Results.

Our property casualty insurance operations generated an underwriting profit for each of the three years ending in 2023. Underwriting results improved in 2023, compared with 2022, due to improved overall insured loss experience before catastrophe effects, as price increases helped to offset elevated losses reflecting economic or other forms of inflation that increased our uncertainty regarding ultimate losses. Loss experience in 2022 was much worse than in 2021, including higher current accident year loss and loss expenses before catastrophe losses that rose 20%, exceeding earned premium growth of 12%. Loss experience is discussed further in Financial Results for our property casualty business and related segments. The $261 million improvement in 2023 underwriting profit, compared with 2022, also included a $31 million increase in losses from natural catastrophe events and $81 million more benefit from net favorable reserve development on prior accident years before catastrophe losses. The $591 million decrease in 2022, compared with excellent results in 2021, included a $135 million increase in losses from catastrophe events and $276 million less benefit from net favorable reserve development on prior accident years before catastrophe losses.

We measure property casualty underwriting profitability primarily by the combined ratio. Our combined ratio measures the percentage of each earned premium dollar spent on claims plus all expenses related to our property casualty operations, all on a pretax basis. A lower ratio indicates more favorable results and better underlying performance. A ratio below 100% represents an underwriting profit. Initiatives to improve our combined ratio are discussed in Item 1, Our Business and Our Strategy, Strategic Initiatives. In 2023, 2022 and 2021, favorable development on reserves for claims that occurred in prior accident years helped offset other incurred losses and loss expenses. Reserve development is discussed further in Property Casualty Loss and Loss Expense

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Obligations and Reserves. Losses from weather-related catastrophes are another important item influencing the combined ratio and are discussed along with other factors in Financial Results for our property casualty business and related segments.

Our life insurance segment reported a profit of $41 million in 2023 and profit of $27 million in 2022. We discuss results for the segment in Life Insurance Results. Most of this segment’s investment income is included in our investments segment results. In addition to investment income, investment gains from the life insurance investment portfolio are also included in our investments segment results.