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CINCINNATI FINANCIAL CORP – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction
The purpose of Management's Discussion and Analysis is to provide an understanding ofCincinnati Financial Corporation's consolidated results of operations and financial condition. Our Management's Discussion and Analysis should be read in conjunction with Item 8, Consolidated Financial Statements and related Notes. We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and stock dividends. We begin with an executive summary of our results of operations, followed by other highlights and details about critical accounting estimates. In several instances, we refer to estimated industry data so that we can provide information on our performance within the context of the overall insurance industry. Unless otherwise noted, the industry data is prepared byA.M. Best , a leading insurance industry statistical, analytical and financial strength rating organization. Information fromA.M. Best is presented on a statutory accounting basis for insurance company regulation inthe 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 inthe United States of America (GAAP). Through TheCincinnati Insurance Company ,Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on net written premium volume for the first nine months of 2021, among approximately 2,000U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies in 46 states as discussed in Item 1, Our Business and Our Strategy. TheU.S. economy, the insurance industry and our company continue to face many challenges. Our long-term perspective has allowed us to address immediate challenges while also focusing on the major decisions that best position the company for success through all market cycles. We believe that this forward-looking view consistently benefits our shareholders, agents, policyholders and associates. To measure our progress, we have defined a measure of value creation that we believe captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. We refer to this measure as our value creation ratio (VCR) and it is made up of two primary components: (1) our rate of growth in book value per share plus (2) the ratio of dividends declared per share to beginning book value per share. This measure, intended to be all-inclusive regarding changes in book value per share, uses originally reported book value per share in cases where book value per share has been adjusted, such as after the adoption of Accounting Standards Updates with a cumulative effect of a change in accounting. The primary sources of our company's net income are summarized below. We discuss contributions to net income and VCR by source in Corporate Financial Highlights, followed by more detailed discussion in Financial Results.
•Underwriting profit (loss) - Includes revenues from earned premiums for
insurance and reinsurance policies or contracts, reduced by losses and loss
expenses from associated insurance coverages. Those revenues are further reduced
by underwriting expenses associated with marketing policies or related to
administration of our insurance operation. The net result represents an
underwriting profit when revenues exceed losses and expenses.
•Investment income - Is generated primarily from investing the premiums
collected for insurance policies sold, until funds are needed to pay losses for
insurance claims or other expenses. Interest income from bonds or dividend
income from stocks are the main categories of our investment income, with
additional contribution from compounding effects over time.
•Investment gains and losses - Occur from appreciation or depreciation of
invested assets over time. Gains or losses are generally recognized from changes
in market values of equity securities without a sale or when invested assets are
sold or become impaired.
Cincinnati Financial Corporation - 2021 10-K - Page 46
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Executive Summary
Our value creation ratio, defined above, is our primary performance target. VCR
trends are shown in the table below.
One Three-year Five-year
year % average % average
Value creation ratio:
As of December 31, 2021 25.7 % 23.6 % 18.7 %
As of December 31, 2020 14.7 15.0 16.5
As of December 31, 2019 30.5 17.8 14.2
We are targeting an annual value creation ratio averaging 10% to 13% over the
next five-year period. At 25.7% for 2021, our performance exceeded the high end
of that range. We also exceeded the high end of the range for both the
three-year and five-year periods that ended in December 2021 .
The table below shows the primary components of our value creation ratio on a
percentage basis. Analysis of the components aids understanding of our financial
performance. Our financial results are further analyzed in the Corporate
Financial Highlights section below.
Years ended December 31, 2021-2020 2020-2019
2021 2020 2019 Pt. Change Pt. Change
Value creation ratio major components:
Net income before investment gains 9.7 % 5.5 % 8.9 % 4.2 (3.4)
Change in fixed-maturity securities, realized and
unrealized gains (1.5) 3.0 5.5 (4.5) (2.5)
Change in equity securities, investment gains 16.8 7.5 16.6 9.3 (9.1)
Other 0.7 (1.3) (0.5) 2.0 (0.8)
Value creation ratio 25.7 % 14.7 % 30.5 % 11.0 (15.8)
The 2021 value creation ratio increased by 11.0 percentage points, compared with
2020, including improved operating results and a higher valuation for our
investment portfolio, as shown in the table above. The decrease in 2020,
compared with 2019, was primarily due to a less favorable valuation for our
investment portfolio.
We believe our value creation ratio is a useful measure. The table below shows
calculations for VCR.
(Dollars are per share) Years ended December 31,
2021 2020 2019
Value creation ratio:
End of period book value* $ 81.72 $ 67.04 $ 60.55
Less beginning of period book value 67.04 60.55 48.10
Change in book value 14.68 6.49 12.45
Dividend declared to shareholders 2.52 2.40 2.24
Total value creation $ 17.20
Value creation ratio from change in book value** 21.9 % 10.7 % 25.9 % Value creation ratio from dividends declared to shareholders*** 3.8 4.0 4.6 Value creation ratio 25.7 % 14.7 % 30.5 %
* 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
Cincinnati Financial Corporation - 2021 10-K - Page 47 --------------------------------------------------------------------------------
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 7.2% over the five-year period 2017 through 2021, exceeding the 5.8% estimated growth rate for the property casualty insurance industry, with 2021 representing industry data reported through the first nine months of 2021. 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 95% to 100%. Our GAAP combined ratio averaged 94.8% over the five-year period 2017 through 2021, slightly better than the performance target range. Performance as measured by the combined ratio is discussed in Consolidated Property Casualty Insurance Results. Our statutory combined ratio averaged 94.2% over the five-year period 2017 through 2021, compared with an estimated 100.3% for the property casualty industry, with 2021 representing industry data reported through the first nine months of 2021. 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 3.7% over the five-year period 2017 through 2021.
•Over the five years endedDecember 31, 2021 , our equity portfolio compound annual total return was 18.0% compared with a compound annual total return of 18.5% for the Index. Our equity portfolio favors larger-capitalization, high-quality, dividend-growing stocks with a slight value orientation. For the year 2021, our equity portfolio total return was 29.6%, compared with 28.7% for the Index. The board of directors is committed to rewarding shareholders directly through cash dividends and share repurchase authorizations. Through 2021, the company has increased the annual cash dividend rate for 61 consecutive years, a record we believe is matched by only seven other publicly tradedU.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 2021 increase to the regular dividend reflected confidence in our strong 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.
Cincinnati Financial Corporation - 2021 10-K - Page 48 --------------------------------------------------------------------------------
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
(Dollars in millions, except share data) At December 31, At December 31,
2021 2020
Total investments $ 24,666 $ 21,542
Total assets 31,387 27,542
Short-term debt 54 54
Long-term debt 789 788
Shareholders' equity 13,105 10,789
Book value per share 81.72 67.04
Debt-to-total-capital ratio 6.0 %
7.2 %
Total investments increased by 15% during 2021 on a fair value basis, with an increase in our securities portfolio valuation that added to a 7% increase in its cost basis. Entering 2022, 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 rose 14%. Shareholders' equity increased by 21% and book value per share increased by 22%, for reasons discussed in the preceding Executive Summary. The amount of our debt obligations increased by$1 million in 2021, compared with 2020. Our 6.0% ratio of debt to total capital (debt plus shareholders' equity) at year-end 2021 decreased by 1.2 percentage points compared with the prior-year ratio. Income Statement and Per Share Data (In millions, except per share data) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Earned premiums$ 6,482 $ 5,980 $ 5,604 8 7 Investment income, net of expenses (pretax) 714 670 646 7 4 Investment gains and losses, net (pretax) 2,409 865 1,650 178 (48) Total revenues 9,630 7,536 7,924 28 (5) Net income 2,946 1,216 1,997 142 (39) Comprehensive income 2,825 1,537 2,423 84 (37) Net income per share - diluted 18.10 7.49 12.10 142 (38) Cash dividends declared per share 2.52 2.40 2.24 5 7 Diluted weighted average shares outstanding 162.7 162.4 165.1 0 (2) Net income rose by$1.730 billion or 142% in 2021, compared with 2020, including a$1.220 billion increase for 2021 net investment gains after taxes. The improved 2021 net income also included an increase in property casualty underwriting income of$483 million after taxes, as discussed below, and a$37 million increase in investment income after taxes. Our investment operation's performance is discussed further in Investments Results. Net income in 2020 decreased by$781 million , compared with 2019, including a$620 million decrease for 2020 net investment gains after taxes. The decrease in 2020 net income also included a decrease in property casualty underwriting income of$175 million after taxes and was partially offset by a$21 million increase in investment income after taxes. During 2021, SARS-CoV-2, also known as COVID-19 and recognized as a pandemic by theWorld Health Organization , continued to cause dampening economic effects in some areas where we operate, while many areas experienced strengthening economic effects due to increased business activity and consumer spending. In 2020, it caused significant effects, including temporary closures of many businesses and reduced consumer spending due Cincinnati Financial Corporation - 2021 10-K - Page 49 -------------------------------------------------------------------------------- to shelter-in-place, stay-at-home and other governmental actions. Those orders and the uncertainty surrounding COVID-19 had broad financial market effects and caused significant market disruption and volatility. As the pandemic unfolded in 2020 and continued into 2021, management met with the board of directors frequently to discuss matters such as our response to prioritize the health and safety of our associates, agents and policyholders. Discussion also included near-term and longer-term financial effects. As stay-at-home orders were enacted, we promptly and effectively transitioned most of our headquarters associates to working from home. We provided the technology necessary to keep the business running, as associates continued writing and collecting insurance premiums, responding to claims and performing other operational functions. They joined our field associateswho already worked from home, providing agents and policyholders with outstanding service. At the end of 2021, most of our associates continued to work from home. We believe the COVID-19 pandemic did not have a significant effect on our premium revenues for the last three quarters of 2021, while it had a modestly slowing effect on premium growth for the first quarter of the year. In 2020, the pandemic slowed the growth of our premium revenues, including new business written premiums. Premium growth by segment is discussed below in Financial Results. For future periods, renewal premium or new business premium amounts could decline if the basis for policy premiums, such as sales and payrolls of businesses we insure, decrease as a result of the pandemic and a weakening economy. We are not able to determine premium effects for future periods. During 2021, changes to our estimates for incurred losses and expenses related to the pandemic included a$2 million increase in Cincinnati Re® losses, a$1 million decrease in Cincinnati Global Underwriting Ltd.SM (Cincinnati Global) losses and an$8 million decrease in ultimate credit losses related to uncollectible premiums. For full-year 2020, pandemic-related incurred losses and expenses totaled$85 million . The total included$30 million for legal expenses in defense of business interruption claims,$19 million for Cincinnati Re losses,$12 million for Cincinnati Global losses,$8 million for credit losses related to uncollectible premiums and$16 million for the Stay-at-Home policyholder credit for personal auto policies. Factors used in estimating reserves for business interruption legal expenses 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. Approximately half of the losses for Cincinnati Re represent its estimated share from reinsurance treaties with companies that provided affirmative coverage for pandemic-related business interruption, and most of the remainder is an estimated share of treaties covering professional liability. Most of the losses for Cincinnati Global represent its share of potential losses from business interruption coverage for large risks with customized policy terms and conditions. Most of our commercial property policies are written to preclude coverage for business interruption claims unless there is direct physical loss or damage to property. For this reason, most of our standard market commercial property policies in states where we actively write business do not contain a specific virus exclusion. 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 sales or payrolls of businesses we insure, due to pandemic effects or other factors. We are not able to determine loss effects for future periods. As discussed in Investments Results, we reported a net investment gain in 2021, primarily due to a$2.278 billion net favorable change in fair value for equity securities still held. In both 2020 and 2019, we reported net investment gains, including$841 million in 2020 and$1.626 billion in 2019 from net favorable changes in fair value for equity securities still held. Cincinnati Financial Corporation - 2021 10-K - Page 50 -------------------------------------------------------------------------------- Contribution from Insurance Operations (Dollars in millions) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Consolidated property casualty data: Net written premiums$ 6,479 $ 5,864 $ 5,516 10 6 Earned premiums 6,184 5,691 5,334 9 7 Underwriting profit 731 119 341 514 (65) Pt. Change Pt. Change GAAP combined ratio 88.3 % 98.1 % 93.8 % (9.8) 4.3 Statutory combined ratio 87.9 96.7 93.4 (8.8) 3.3 Written premium to statutory surplus 0.9 1.0 1.0 (0.1) 0.0 Property casualty net written premiums grew 10% and earned premiums grew 9% in 2021. 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 3 percentage points from Cincinnati Re. The 2020 growth rate for net written premiums was slower, reflecting the pandemic and related economic effects. Trends and related factors are discussed in Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance Results, respectively. Our property casualty insurance operations generated an underwriting profit for each of the three years ending in 2021. The$612 million improvement in 2021, compared with 2020, included a$195 million decrease in losses from natural catastrophe events and$265 million more benefit from net favorable reserve development on prior accident years before catastrophe losses. The$222 million decrease in 2020, compared with 2019, included a$370 million increase in losses from catastrophe events and$121 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 2021, 2020 and 2019, 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 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 loss of$16 million in 2021 and profit of$11 million in 2020. 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. Cincinnati Financial Corporation - 2021 10-K - Page 51 --------------------------------------------------------------------------------
Critical Accounting Estimates
Cincinnati Financial Corporation's financial statements are prepared usingU.S. GAAP. These principles require management 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. The significant accounting policies used in the preparation of the financial statements are discussed in Item 8, Note 1 of the Consolidated Financial Statements. In conjunction with that discussion, material implications of uncertainties associated with the methods, assumptions and estimates underlying the company's critical accounting policies are discussed below. The audit committee of the board of directors reviews the annual financial statements with management and the independent registered public accounting firm. These discussions cover the quality of earnings, review of reserves and accruals, reconsideration of the suitability of accounting principles, review of highly judgmental areas including critical accounting estimates, audit adjustments and such other inquiries as may be appropriate.
Property Casualty Insurance Loss and Loss Expense Reserves
We establish loss and loss expense reserves for our property casualty insurance business as balance sheet liabilities. Unpaid loss and loss expenses are the estimated amounts necessary to pay for and settle all outstanding insured claims, including incurred but not reported (IBNR) claims. These reserves account for unpaid loss and loss expenses as of a financial statement date. For some lines of business that we write, a considerable and uncertain amount of time can elapse between the occurrence, reporting and payment of insured claims. The amount we will actually have to pay for such claims also can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. Gross loss and loss expense reserves were$7.229 billion at year-end 2021 compared with$6.677 billion at year-end 2020. How Reserves Are Established Our field claims representatives establish case reserves when claims are reported to the company to provide for our unpaid loss and loss expense obligation associated with known claims. Field claims managers supervise and review all claims with case reserves less than$100,000 . Additionally, a headquarters supervisor and regional claims manager review claims under$100,000 if litigation or a certain specialty claim is involved. All claims with case reserves of$100,000 or greater are reviewed and approved by experienced headquarters supervisors and regional claims managers. Upper-level headquarters claims managers also review case reserves of$175,000 or more.
Our claims representatives base their case reserve estimates primarily upon
case-by-case evaluations that consider:
•type of claim involved
•circumstances surrounding each claim
•policy provisions pertaining to each claim
•potential for subrogation or salvage recoverable
•general insurance reserving practices
Case reserves of all sizes are subject to review on a 90-day cycle, or more
frequently if new information about a loss becomes available. As part of the
review process, we monitor industry trends, cost trends, relevant court cases,
legislative activity and other current events in an effort to ascertain new or
additional loss exposures.
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We also establish IBNR reserves to provide for all unpaid loss and loss expenses
not accounted for by case reserves:
•For events designated as natural catastrophes resulting in losses incurred related to premiums written on a direct basis byThe Cincinnati Insurance Companies, we calculate IBNR reserves directly as a result of an estimated IBNR claim count and an estimated average claim amount for each event. Once case reserves are established for a catastrophe event, we reduce the IBNR reserves. Our claims department management coordinates the assessment of these events and prepares the related IBNR reserve estimates. Such an assessment involves a comprehensive analysis of the nature of the event, of policyholder exposures within the affected geographic area and of available claims intelligence. Depending on the nature of the event, available claims intelligence could include surveys of field claims associates within the affected geographic area, feedback from a catastrophe claims team sent into the area, as well as data on claims reported as of the financial statement date. To determine whether an event is designated as a catastrophe, related to premiums written on a direct basis by The Cincinnati Insurance Companies, we generally use the catastrophe definition provided by Property Claims Service (PCS), a division ofInsurance Services Office . PCS defines a catastrophe as an event that causesU.S. ,Puerto Rico andU.S. Virgin Islands damage of$25 million or more in insured property losses and affects a significant number of policyholders and insureds. •For events designated as natural catastrophes resulting in losses for Cincinnati Re and Cincinnati Global, we begin with a review of in-force policies, treaties and related limits likely to be affected by each event. For both Cincinnati Re and Cincinnati Global, use of information from third-party catastrophe models, industry estimates, and our own proprietary adjustments are used for the estimate of ultimate losses for each catastrophe event. Incurred losses from catastrophe events for both Cincinnati Re and Cincinnati Global can be designated catastrophes by PCS, or deemed as a catastrophe by the international insurance industry or, for Cincinnati Re, as reported by ceding companies. IBNR reserves are calculated as the difference between the estimate of the ultimate loss and loss expenses and the sum of total loss and loss expense payments and total case reserves. •For asbestos and environmental claims, we calculate IBNR reserves by deriving an actuarially-based estimate of total unpaid loss and loss expenses. We then reduce the estimate by total case reserves. We discuss the reserve analysis that applies to asbestos and environmental reserves in Liquidity and Capital Resources, Asbestos and Environmental Loss and Loss Expense Reserves. •For loss expenses that pertain primarily to salaries and other costs related to our claims department associates, also referred to as adjusting and other expense or AOE, we calculate reserves based on an analysis of the relationship between paid losses and paid AOE. Reserves for AOE are allocated to company, line of business and accident year based on a claim count algorithm. Claim counts reported and used in the reserving process are primarily measured by insurance coverages that are triggered when a loss occurs and a reserve is established. Coverages are defined as unique combinations of certain attributes such as line of business and cause of loss. Claims that are opened and closed without payment are included in the reported claim counts. Claim counts are presented on a direct basis only and do not reflect any assumed or ceded reinsurance. •For all other claims and events, including reinsurance assumed or ceded, IBNR reserves are calculated as the difference between an actuarial estimate of the ultimate cost of total loss and loss expenses incurred reduced by the sum of total loss and loss expense payments and total case reserves estimated for individual claims. Reserve amounts for those other claims and events are significant, and represent the majority of amounts shown as IBNR reserves and loss expense reserves in the table included in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves. We discuss below the development of actuarially based estimates of the ultimate cost of total loss and loss expenses incurred. Our actuarial staff applies significant judgment in selecting models and estimating model parameters when preparing reserve analyses. Unpaid loss and loss expenses are inherently uncertain as to timing and amount. Uncertainties relating to model appropriateness, parameter estimates and actual loss and loss expense amounts are referred to as model, parameter and process uncertainty, respectively. Our management and actuarial staff address these uncertainties in the reserving process in a variety of ways.Cincinnati Financial Corporation - 2021 10-K - Page 53 -------------------------------------------------------------------------------- Our actuarial staff bases its IBNR reserve estimates for these losses primarily on the indications of methods and models that analyze accident year data. Accident year is the year in which an insured claim, loss or loss expense occurred. The specific methods and models that our actuaries have used for the past several years are:
•paid and reported loss development methods
•paid and reported loss Bornhuetter-Ferguson methods
•individual and multiple probabilistic trend family models
Our actuarial staff uses diagnostics provided by stochastic reserving software to evaluate the appropriateness of the models and methods listed above. The software's diagnostics have indicated that the appropriateness of these models and methods for estimating IBNR reserves for our lines of business tends to depend on a line's tail. Tail refers to the time interval between a typical claim's occurrence and its settlement. For our long-tail lines such as workers' compensation, commercial casualty and certain other liability lines, models from the probabilistic trend family tend to provide superior fits and to validate well, compared with models underlying the loss development and Bornhuetter-Ferguson methods. The loss development and Bornhuetter-Ferguson methods, particularly the reported loss variations, tend to produce the more appropriate IBNR reserve estimates for our short-tail lines such as homeowner and commercial property. For our mid-tail lines such as personal and commercial auto liability, all models and methods provide useful insights. Our actuarial staff also devotes significant time and effort to the estimation of model and method parameters. The loss development and Bornhuetter-Ferguson methods require the estimation of numerous loss development factors. The Bornhuetter-Ferguson methods also involve the estimation of numerous expected loss ratios by accident year. Models from the probabilistic trend family require the estimation of development trends, calendar year inflation trends and exposure levels. Consequently, our actuarial staff monitors a number of trends and measures to gain key business insights necessary for exercising appropriate judgment when estimating the parameters mentioned, such as:
•company and industry pricing
•company and industry exposure
•company and industry loss frequency and severity
•past large loss events
•company and industry premium
•company in-force policy count
These trends and measures also support the estimation of expected accident year loss ratios needed for applying the Bornhuetter-Ferguson methods and for assessing the reasonability of all IBNR reserve estimates computed. Our actuarial staff reviews these trends and measures quarterly, updating parameters derived from them as necessary. Quarterly, our actuarial staff summarizes their reserve analysis by preparing an actuarial best estimate and a range of reasonable IBNR reserves intended to reflect the uncertainty of the estimate. An inter-departmental committee that includes our actuarial management team reviews the results of each quarterly reserve analysis. The committee establishes management's best estimate of IBNR reserves, which is the amount that is included in each period's financial statements. In addition to the information provided by actuarial staff, the committee also considers factors such as:
•large loss activity and trends in large losses
•new business activity
•judicial decisions
•general economic trends such as inflation
•trends in litigiousness and legal expenses
•product and underwriting changes
•changes in claims practices
Cincinnati Financial Corporation - 2021 10-K - Page 54 -------------------------------------------------------------------------------- The determination of management's best estimate, like the preparation of the reserve analysis that supports it, involves considerable judgment. Changes in reserving data or the trends and factors that influence reserving data may signal fundamental shifts or may simply reflect single-period anomalies. Even if a change reflects a fundamental shift, the full extent of the change may not become evident until years later. Moreover, since our methods and models do not explicitly relate many of the factors we consider directly to reserve levels, we typically cannot quantify the precise impact of such factors on the adequacy of reserves prospectively or retrospectively. Due to the uncertainties described above, our ultimate loss experience could prove better or worse than our carried reserves reflect. To the extent that reserves are inadequate and increased, the amount of the increase is a charge in the period that the deficiency is recognized, raising our loss and loss expense ratio and reducing earnings. To the extent that reserves are redundant and released, the amount of the release is a credit in the period that the redundancy is recognized, reducing our loss and loss expense ratio and increasing earnings.
Key Assumptions - Loss Reserving
Our actuarial staff makes a number of key assumptions when using their methods and models to derive IBNR reserve estimates. Appropriate reliance on these key assumptions essentially entails determinations of the likelihood that statistically significant patterns in historical data may extend into the future. The four most significant of the key assumptions used by our actuarial staff and approved by management are: •Emergence of loss and defense and cost containment expenses, also referred to as DCCE, on an accident year basis. Historical paid loss, reported loss and paid DCCE data for the business lines we analyze contain patterns that reflect how unpaid losses, unreported losses and unpaid DCCE as of a financial statement date will emerge in the future. Unless our actuarial staff or management identifies reasons or factors that invalidate the extension of historical patterns into the future, these patterns can be used to make projections necessary for estimating IBNR reserves. Our actuaries significantly rely on this assumption in the application of all methods and models mentioned above.
•Calendar year inflation. For long-tail and mid-tail business lines, calendar
year inflation trends for future paid losses and paid DCCE do not vary
significantly from a stable, long-term average. Our actuaries base reserve
estimates derived from probabilistic trend family models on this assumption.
•Exposure levels. Historical earned premiums, when adjusted to reflect common levels of product pricing and loss cost inflation, can serve as a proxy for historical exposures. Our actuaries require this assumption to estimate expected loss ratios and expected DCCE ratios used by the Bornhuetter-Ferguson reserving methods. They may also use this assumption to establish exposure levels for recent accident years, characterized by "green" or immature data, when working with probabilistic trend family models. •Claims having atypical emergence patterns. Characteristics of certain subsets of claims, such as high frequency, high severity, or mass tort claims, have the potential to distort patterns contained in historical paid loss, reported loss and paid DCCE data. When testing indicates this to be the case for a particular subset of claims, our actuaries segregate these claims from the data and analyze them separately. Subsets of claims that could fall into this category include hurricane claims or claims for other weather events where total losses we incurred were very large, individual large claims and asbestos and environmental claims.
These key assumptions have not changed since 2005, when our actuarial staff
began using probabilistic trend family models to estimate IBNR reserves.
Paid losses, reported losses and paid DCCE are subject to random as well as
systematic influences. As a result, actual paid losses, reported losses and paid
DCCE are virtually certain to differ from projections. Such differences are
consistent with what specific models for our business lines predict and with the
related patterns in the historical data used to develop these models.
As a result, management does not closely monitor statistically insignificant
differences between actual and projected data.
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Reserve Estimate Variability
Management believes that the standard error of a reserve estimate, a measure of the estimate's variability, provides the most appropriate measure of the estimate's sensitivity. The reserves we establish depend on the models we use and the related parameters we estimate in the course of conducting reserve analyses. However, the actual amount required to settle all outstanding insured claims, including IBNR claims, as of a financial statement date depends on stochastic, or random, elements as well as the systematic elements captured by our models and estimated model parameters. For the lines of business we write, process uncertainty - the inherent variability of loss and loss expense payments - typically contributes more to the imprecision of a reserve estimate than parameter uncertainty.
Consequently, a sensitivity measure that ignores process uncertainty would
provide an incomplete picture of the reserve estimate's sensitivity. Since a
reserve estimate's standard error accounts for both process and parameter
uncertainty, it reflects the estimate's full sensitivity to a range of
reasonably likely scenarios.
The table below provides standard errors and reserve ranges by major property casualty lines of business and in total for net loss and loss expense reserves as well as the potential effects on our net income, assuming a 21% federal tax rate. Standard errors and reserve ranges for assorted groupings of these lines of business cannot be computed by simply adding the standard errors and reserve ranges of the component lines of business, since such an approach would ignore the effects of product diversification. See Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves, Range of Reasonable Reserves, for more details on our total reserve range. While the table reflects our assessment of the most likely range within which each line's actual unpaid loss and loss expenses may fall, one or more lines' actual unpaid loss and loss expenses could nonetheless fall outside of the indicated ranges. (Dollars in millions)
Net loss and loss expense range of reserves
Carried Net income
reserves Low point High point Standard error effect
At December 31, 2021
Total $ 6,902 $ 6,446 $ 7,014 $ 284 $ 224
Commercial casualty $ 2,464 $ 2,222 $ 2,655 $ 217 $ 171
Commercial property 456 314 527 107 85
Commercial auto 759 708 798 45 36
Workers' compensation 965 815 989 87 69
Personal auto 292 272 313 21 17
Homeowners 299 282 316 17 13
Excess and surplus 562 521 603 43 34
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Life Policy and Investment Contract Reserves
We establish the reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates 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 and morbidity. We use our own experience and historical trends for setting our assumptions for expected withdrawal rates and expenses. We base our assumptions for expected investment income on our own experience adjusted for current and future expected economic conditions. We establish reserves for our universal life, deferred annuity and investment contracts equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life insurance 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.
Asset Impairment
Our investment portfolio is our largest asset. We monitor the fixed-maturity portfolio and all other assets for signs of credit-related or other impairment. We monitor decreases in the fair value of invested assets and the need for an allowance for credit losses for our fixed-maturity portfolio; allowances for expected credit losses on receivable and recoverable assets considering past events, current conditions and reasonable and supportable forecasts; an accumulation of company costs in excess of the amount originally expected to acquire or construct an asset; or other factors such as bankruptcy, deterioration of creditworthiness, failure to pay interest; and changes in legal factors or in the business climate. The application of our invested assets impairment policy resulted in write-downs of impaired securities intended to be sold that reduced our income before income taxes by$1 million in 2021 and$78 million in 2020, and other-than-temporary impairment (OTTI) charges of$9 million in 2019. Write-downs and OTTI losses represent noncash charges to income and are reported as investment losses. The application of our non-invested assets impairment policy did not have a material effect on our financial condition in 2021 or 2020. Our internal investment portfolio managers monitor their assigned portfolios. If a fixed-maturity security is valued below amortized cost, the portfolio managers undertake additional reviews. Such declines often occur in conjunction with events taking place in the overall economy and market, combined with events specific to the industry or operations of the issuing organization. Managers review quantitative measurements such as a declining trend in fair value and the extent of the fair value decline, as well as qualitative measures such as pending events, credit ratings and issuer liquidity. We are even more proactive when these declines in valuation are greater than might be anticipated when viewed in the context of overall economic and market conditions. We provide detailed information about fixed-maturity securities fair valued in a continuous loss position at year-end 2020 in Item 7A, Quantitative and Qualitative Disclosures About Market Risk. An available for sale fixed maturity is impaired if the fair value of the security is below amortized cost. The impaired loss is charged to net income when we have the intent to sell the security or it is more likely than not we will be required to sell the security before recovery of the amortized cost. For impaired securities we intend to hold, an allowance for credit related losses is recorded in investment losses when the company determines a credit loss has been incurred based on certain factors such as adverse conditions, credit rating downgrades or failure of the issuer to make scheduled principal or interest payments. A credit loss is determined using a discounted cash flow analysis by comparing the present value of expected cash flows with the amortized cost basis, limited to the difference between fair value and amortized cost. Noncredit losses are recognized in other comprehensive income as a change in unrealized gains and losses on investments. We provide information about valuations of our invested assets in Item 8, Note 2 of the Consolidated Financial Statements.Cincinnati Financial Corporation - 2021 10-K - Page 57 --------------------------------------------------------------------------------
Fair Value Measurements
Valuation of Financial Instruments
Fair value is defined as the exit price or the amount that would be (1) received to sell an asset or (2) paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date. When determining an exit price, we must, whenever possible, rely upon observable market data. We have categorized our financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level that is significant to the fair value measurement of the instrument. While we consider pricing data from outside services, we ultimately determine whether the data or inputs used by these outside services are observable or unobservable. Financial assets and liabilities recorded in the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as described in Item 8, Note 3 of the Consolidated Financial Statements.
Level 1 and Level 2 Valuation Techniques
Substantially all of the$24.337 billion of securities in our investment portfolio at year-end 2021, measured at fair value, are classified as Level 1 or Level 2. Financial assets that fall within Level 1 and Level 2 are priced according to observable data from identical or similar securities that have traded in the marketplace. Also within Level 2 are securities that are valued by outside services or brokers where we have evaluated and verified the pricing methodology and determined that the inputs are observable.
Recent Accounting Pronouncements
Information about recent accounting pronouncements is provided in Item 8, Note 1
of the Consolidated Financial Statements.
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Financial Results
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 We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary,CFC Investment Company . In addition, Other includes the financial results of our reinsurance assumed operations, known as Cincinnati Re, and ourLondon -based global specialty underwriter known as Cincinnati Global. We measure profit or loss for our commercial lines, personal lines, excess and surplus lines and life insurance segments based upon underwriting results (profit or loss), which represent net earned premium less loss and loss expenses, or contract holders' benefits incurred, and underwriting expenses on a pretax basis. We also evaluate results for our consolidated property casualty insurance operations. That is the total of our standard market segments (commercial lines and personal lines), our excess and surplus lines insurance segment, Cincinnati Re and Cincinnati Global. For analysis of our consolidated property casualty insurance results, it is important to include the earned premiums, loss and loss expenses and also underwriting expenses reported as Other. Underwriting results and segment pretax operating income are not substitutes for net income determined in accordance with GAAP. For our consolidated property casualty insurance operations as well as the insurance segments, statutory accounting data and ratios are key performance indicators that we use to assess business trends and to make comparisons to industry results, since GAAP-based industry data generally is not as readily available. Investments held by the parent company and the investment portfolios for the insurance subsidiaries are managed and reported as the investments segment, separate from our underwriting business. Net investment income and net investment gains and losses for our investment portfolios are discussed in the Investments Results. The calculations of segment data are described in more detail in Item 8, Note 18, of the Consolidated Financial Statements. The following sections provide analysis and discussion of results of operations for each of the five segments.Cincinnati Financial Corporation - 2021 10-K - Page 59 --------------------------------------------------------------------------------
Consolidated Property Casualty Insurance Results
Earned and net written premiums for our consolidated property casualty operations grew in 2021, reflecting average renewal price increases, a higher level of insured exposures and strategic initiatives for targeted growth. A key measure of property casualty profitability is underwriting profit or loss. Our 2021 underwriting profit of$731 million was$612 million more than in 2020, including a$195 million favorable effect from a lower amount of catastrophe losses, mostly caused by severe weather. Prior accident year loss experience before catastrophes during 2021 was more favorable than in 2020, and represented$265 million of the 2021 underwriting profit increase. Improved profitability also included other factors, such as higher pricing and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices. Pandemic-related incurred losses and expenses of$85 million in 2020 were discussed in more detail in Corporate Financial Highlights of Management's Discussion and Analysis. Underwriting profit trends are discussed further below. The table below highlights property casualty results, with analysis and discussion in the sections that follow. That analysis and discussion includes sections by segment. Overview - Three-Year Highlights (Dollars in millions) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Earned premiums$ 6,184 $ 5,691 $ 5,334 9 7 Fee revenues 10 9 11 11 (18) Total revenues 6,194 5,700 5,345 9 7 Loss and loss expenses from: Current accident year before catastrophe losses 3,462 3,243 3,249 7 0 Current accident year catastrophe losses 562 725 351 (22) 107 Prior accident years before catastrophe losses (363) (98) (219) (270) 55 Prior accident years catastrophe losses (65) (33) (29) (97) (14) Loss and loss expenses 3,596 3,837 3,352 (6) 14 Underwriting expenses 1,867 1,744 1,652 7 6 Underwriting profit$ 731 $ 119 $ 341 514 (65) Ratios as a percent of earned premiums: Pt. Change Pt. Change Current accident year before catastrophe losses 56.0 % 57.0 % 60.9 % (1.0) (3.9) Current accident year catastrophe losses 9.1 12.7 6.6 (3.6) 6.1 Prior accident years before catastrophe losses (5.9) (1.7) (4.1) (4.2) 2.4 Prior accident years catastrophe losses (1.1) (0.6) (0.6) (0.5) 0.0 Loss and loss expenses 58.1 67.4 62.8 (9.3) 4.6 Underwriting expenses 30.2 30.7 31.0 (0.5) (0.3) Combined ratio 88.3 % 98.1 % 93.8 % (9.8) 4.3 Combined ratio: 88.3 % 98.1 % 93.8 % (9.8) 4.3 Contribution from catastrophe losses and prior years reserve development 2.1 10.4 1.9 (8.3) 8.5 Combined ratio before catastrophe losses and prior years reserve development 86.2 % 87.7 % 91.9 % (1.5) (4.2) We believe the COVID-19 pandemic did not have a significant effect on our consolidated property casualty premium revenues for the last three quarters of 2021, while it had a modestly slowing effect on premium growth for the first quarter. The pandemic and a weakened economy reduced premium volume during the first quarter of 2021 and during much of 2020. A strengthening economy in 2021 contributed to premium growth, compared with the same period a year ago. Consolidated property casualty net written premiums grew 10% in 2021, compared with 2020, including a contribution of 3% from Cincinnati Re. Cincinnati Financial Corporation - 2021 10-K - Page 60 -------------------------------------------------------------------------------- Consolidated property casualty new business written premiums increased 12% in 2021, compared with 2020. For policies that renewed during 2021, higher average pricing also contributed to premium growth. Regardless of pricing changes, new business and renewal premium amounts could decline if the exposure basis for policy premiums, such as sales and payrolls of businesses we insure, decrease as a result of a weakened economy. Loss experience for our insurance operations is influenced by many factors as discussed in further detail in Financial Results by property casualty insurance segment. For future periods, factors that reduce exposure to certain insurance losses, such as fewer vehicular miles driven or reduced sales and payrolls for businesses, could cause a reduction in future losses that generally correspond to reduced premiums. However, there could be losses or legal expenses that occur independent of changes in mileage, sales or payrolls of businesses we insure, due to pandemic effects or other factors.
Performance highlights for consolidated property casualty operations also
included:
•Premiums - Agency renewal written premiums rose$351 million in 2021 and continued to contribute to growth in earned premiums and net written premiums that rose in each of our property casualty segments. The renewal premium increase was largely due to average renewal price increases and a higher level of insured exposures. Price increases with enhanced precision continue to benefit operating results. New business written premiums produced through agencies increased$98 million in 2021, compared with 2020. Agents appointed during 2021 or 2020 produced a 2021 increase in standard lines new business of$50 million . Growth initiatives also favorably affect growth in subsequent years, particularly as newer agency relationships mature over time. Expansion of Cincinnati Re produced$461 million of 2021 net written premiums and contributed$159 million of the growth in other written premiums, compared with 2020. Cincinnati Re assumes risks through reinsurance treaties and in some cases cedes part of the risk and related premiums to one or more unaffiliated reinsurance companies through transactions known as retrocessions. In 2021, earned premiums for Cincinnati Re totaled$392 million . Cincinnati Global also contributed to the increase in other written premiums. Net written premiums were$187 million in 2021, and contributed$10 million of the growth in other written premiums, compared with 2020. In 2021, earned premiums for Cincinnati Global totaled$178 million . Other written premiums also include premiums ceded to reinsurers as part of our ceded reinsurance program. An increase in ceded premiums, other thanCincinnati Re and Cincinnati Global premiums, reduced net written premium growth by$15 million in 2021.
The table below analyzes premium revenue components and trends.
(Dollars in millions) Years ended December 31, 2021-2020 2020-2019
2021 2020 2019 Change % Change %
Agency renewal written premiums $ 5,091 $ 4,740 $ 4,519 7 5
Agency new business written premiums 897 799 778 12 3
Other written premiums 491 325 219 51 48
Net written premiums 6,479 5,864 5,516 10 6
Unearned premium change (295) (173) (182) (71) 5
Earned premiums $ 6,184 $ 5,691 $ 5,334 9 7
•Combined ratio - The combined ratio improved by 9.8 percentage points in 2021,
compared with 2020, including a 4.1 percentage-point decrease in the ratio for
catastrophe losses. The 2021 ratio for current accident year losses and loss
expenses before catastrophes improved by 1.0 percentage point, largely
reflecting what we believe are improvements to some of our loss experience due
to recent-year initiatives to improve pricing precision and claims and loss
control practices. The remainder of the 2021 combined ratio improvement included
4.2 percentage points more benefit in the ratio for prior accident year losses
and loss expenses before catastrophes. We further discuss ratios related to
reserve development in the sections that follow the Catastrophe Losses Incurred
table below.
Our statutory combined ratio was 87.9% in 2021 compared with 96.7% in 2020 and
93.4% in 2019. The estimated statutory combined ratio for the property casualty
industry, with the industry's ratio excluding its mortgage and financial
guaranty lines of business and based on industry data reported through the first
nine months of 2021,
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was 99.5% in 2021, 99.1% in 2020 and 99.2% in 2019. The contribution of
catastrophe losses to our statutory combined ratio was 7.6 percentage points in
2021, 11.2 percentage points in 2020 and 6.0 percentage points in 2019, compared
with industry estimates of 8.2, 7.5 and 4.1 percentage points, respectively,
with 2021 representing industry data reported through the first nine months of
2021. Components of the combined ratio are discussed below.
Catastrophe loss trends are an important factor in assessing trends for overall
underwriting results. Our 10-year historical annual average contribution of
catastrophe losses to the combined ratio was 7.3 percentage points at
EffectiveJune 1, 2021 , we nonrenewed our combined property catastrophe occurrence excess of loss treaty that provided coverage for business written on a direct basis and by Cincinnati Re. We determined that the coverage was no longer cost effective. A restructured reinsurance program became effective for Cincinnati Re only, providing retrocession coverages with various triggers and unique features. Before any recoveries, that program included property catastrophe excess of loss coverage with a total available aggregate limit of$48 million in excess of$80 million per loss. It provided a recovery based on Hurricane Ida losses estimated as ofDecember 31, 2021 . The estimated recovery from the program was$16 million , with a net incurred loss of$80 million for Cincinnati Re in 2021, excluding the benefit of reinstatement premiums estimated at approximately$11 million . The following table shows catastrophe losses incurred for the past two calendar years, net of reinsurance, as well as the effect of loss development on prior period catastrophe reserves. We individually list declared catastrophe events for which our incurred losses reached or exceeded$10 million . Cincinnati Financial Corporation - 2021 10-K - Page 62 -------------------------------------------------------------------------------- Catastrophe Losses Incurred (Dollars in millions, net of reinsurance) Excess and Dates Events Regions Commercial lines Personal lines surplus lines Other Total 2021 Feb. 12-15 Flood, Freeze, Ice, South, West $ 9 $ 5 $ -$ 34 $ 48 Snow, Wind Feb. 16-20 Flood, Freeze, Ice, Midwest, Northeast, South Snow, Wind 18 27 1 8 54 Mar. 24-26 Flood, Hail, Wind Midwest, Northeast, South 12 18 - - 30 Mar. 27-29 Flood, Hail, Wind Midwest, Northeast, South 4 9 - - 13 May 3-4 Flood, Hail, Wind South 8 4 - - 12 Jun. 17-20 Flood, Hail, Wind Midwest 10 16 - - 26 Jun. 24 - Jul. 1 Flood, Hail, Wind Midwest, Northeast, South, West 4 10 - - 14 Jul. 8-10 Flood, Hail, Wind Midwest 5 6 - - 11 Aug. 10-13 Flood, Hail, Wind Midwest, Northeast, South 5 8 - - 13 Aug. 29 - Sep. 2 Flood, Hail, Wind Northeast, South (Ida) 14 36 - 118 168 Dec. 10-12 Flood, Hail, Wind Midwest, Northeast, South 40 22 - - 62 Dec. 13-16 Flood, Lightning, Wind Midwest, West 10 9 - - 19 All other 2021 catastrophes 29 48 2 13 92 Development on 2020 and prior catastrophes (44) (7) - (14) (65) Calendar year incurred total $ 124 $ 211 $ 3$ 159 $ 497 2020 Jan. 10-12 Flood, hail, wind Midwest, Northeast, South $ 6 $ 4 $ - $ -$ 10 Feb. 5-8 Flood, hail, wind Northeast, South 9 5 - - 14 Mar. 2-4 Flood, hail, wind Midwest, South 58 8 - 5 71 Mar. 27-30 Flood, hail, wind Midwest, Northeast, South 21 14 - - 35 Apr. 7-9 Flood, hail, wind Midwest, Northeast, South 29 29 - - 58 Apr. 10-14 Flood, hail, wind Midwest, Northeast, South 22 27 - 1 50 May 4-5 Flood, hail, wind Midwest, South 22 5 - - 27 May 26 - Jun. 8 Civil unrest Midwest, Northeast, South, West 16 - 1 5 22 Jul. 10-12 Flood, hail, wind Midwest, South 15 13 - - 28 Jul. 30 - Aug. 5 Flood, hail, wind International, South, Northeast 6 19 - 1 26 Aug. 8-11 Flood, hail, wind Midwest 84 20 1 - 105 Aug. 26-28 Flood, hail, wind South (Laura) 2 2 - 41 45 Sep. 7-16 Wildfire West 9 4 - - 13 Sep. 14-18 Flood, hail, wind South (Sally) 8 4 - 25 37 Oct. 9-12 Flood, hail, wind South (Delta) - 1 - 14 15 Oct. 28-29 Flood, hail, wind South (Zeta) 7 15 - 9 31 Nov. 15-16 Flood, hail, wind Midwest, Northeast, South 4 6 - - 10 Dec. 25 Explosion South 20 - - - 20 All other 2020 catastrophes 38 57 3 10 108 Development on 2019 and prior catastrophes (14) (8) - (11) (33) Calendar year incurred total $ 362 $ 225 $ 5$ 100 $ 692 Cincinnati Financial Corporation - 2021 10-K - Page 63
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Consolidated Property Casualty Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. For all property casualty lines of business in aggregate, net loss and loss expense reserves atDecember 31, 2021 , were$502 million higher than at year-end 2020, including$202 million for incurred but not reported (IBNR) reserves. The$502 million reserve increase raised year-end 2020 net loss and loss expense reserves by 8%, compared with a 9% increase in 2021 earned premiums. Most of the incurred losses and loss expenses shown in the consolidated property casualty insurance results three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than half of our consolidated property casualty current accident year incurred losses and loss expenses represents net paid amounts, the majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 69.7% accident year 2020 loss and loss expense ratio reported as ofDecember 31, 2020 , developed favorably by 4.9 percentage points to 64.8% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as ofDecember 31, 2021 . Accident years 2020 and 2019 have both developed favorably, as indicated by the progression over time for the ratios in the table. (Dollars in millions) Accident year loss and loss expenses incurred and ratios to earned premiums: Accident year: 2021 2020 2019 2021 2020 2019 as of December 31, 2021$ 4,024 $ 3,686 $ 3,463 65.1 % 64.8 % 64.9 % as of December 31, 2020 3,968 3,519 69.7 66.0 as of December 31, 2019 3,600 67.5 Catastrophe loss trends, discussed above, accounted for some of the movement in the current accident year loss and loss expense ratio for 2020, compared with 2019. Catastrophe losses added 9.1 percentage points in 2021, 12.7 points in 2020 and 6.6 points in 2019 to the respective consolidated property casualty current accident year loss and loss expense ratios in the table above. The 56.0% ratio for current accident year loss and loss expenses before catastrophe losses for 2021 decreased 1.0 percentage points compared with the 57.0% accident year 2020 ratio measured as ofDecember 31, 2020 . The decrease was partially offset by a 1.5 percentage-point increase in the ratio for current accident year losses of$1 million or more per claim, shown in the table below. Reserve development on prior accident years continued to net to a favorable amount in 2021, and was primarily due to less-than-anticipated loss emergence on known claims. We recognized$428 million of favorable development in 2021, compared with$131 million in 2020 and$248 million in 2019. Of the$297 million increase in 2021, compared with 2020,$207 million was attributable to our commercial casualty, commercial property and commercial auto lines of business. Approximately 66% of our net favorable reserve development on prior accident years recognized during 2021 occurred in our commercial casualty, commercial property and workers' compensation lines of business. In 2020, our commercial casualty, workers' compensation and commercial property lines of business were responsible for approximately 83% of the favorable reserve development. As discussed in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves,Property Casualty Insurance Development of Estimated Reserves by Accident Year, commercial casualty and workers' compensation are considered long-tail lines with the potential for revisions inherent in estimating reserves. Favorable development recognized during 2018 was primarily from our commercial casualty, commercial property and workers' compensation lines of business. Development by accident year is further discussed in Liquidity and Capital Resources,Property Casualty Insurance Development of Estimated Reserves by Accident Year. Cincinnati Financial Corporation - 2021 10-K - Page 64 --------------------------------------------------------------------------------
Consolidated Property Casualty Insurance Losses by Size
(Dollars in millions, net of reinsurance)
Years ended December 31, 2021-2020 2020-2019
2021 2020 2019 Change % Change %
Current accident year losses greater than
$5,000,000 $ 112 $ 50 $ 27 124 85
Current accident year losses
$1,000,000-$5,000,000 257 202 243 27 (17)
Large loss prior accident year reserve
development 95 42 50 126 (16)
Total large losses incurred 464 294 320 58 (8)
Losses incurred but not reported (19) 310 50 nm nm
Other losses excluding catastrophe losses 2,062 1,909 2,118 8 (10)
Catastrophe losses 472 670 309 (30) 117
Total losses incurred $ 2,979 $ 3,183 $ 2,797 (6) 14
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year losses greater than
$5,000,000 1.8 % 0.9 % 0.5 % 0.9 0.4
Current accident year losses
$1,000,000-$5,000,000 4.2 3.6 4.6 0.6 (1.0)
Large loss prior accident year reserve
development 1.5 0.7 0.9 0.8 (0.2)
Total large loss ratio 7.5 5.2 6.0 2.3 (0.8)
Losses incurred but not reported (0.3) 5.5 0.9 (5.8) 4.6
Other losses excluding catastrophe losses 33.4 33.4 39.7 0.0 (6.3)
Catastrophe losses 7.6 11.8 5.8 (4.2) 6.0
Total loss ratio 48.2 % 55.9 % 52.4 % (7.7) 3.5
In 2021, total large losses incurred increased by $170 million , or 58%, net of
reinsurance, primarily due to an increase for our commercial lines insurance
segment. The corresponding ratio increased 2.3 percentage points. The large loss
data included in the table above does not include Cincinnati Re and Cincinnati
Global. Our analysis of large losses incurred indicated no unexpected
concentration of these losses and reserve increases by geographic region, policy
inception, agency or field marketing territory. We believe the inherent
volatility of aggregate loss experience for our portfolio of larger policies is
greater than that of our portfolio of smaller policies, and we continue to
monitor the volatility in addition to general inflationary trends in loss costs.
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Consolidated Property Casualty Insurance Underwriting Expenses
(Dollars in millions) Years ended December 31, 2021-2020 2020-2019
2021 2020 2019 Change % Change %
Commission expenses $ 1,168 $ 1,042 $ 989 12 5
Other underwriting expenses 694 692 651 0 6
Policyholder dividends 5 10 12 (50) (17)
Total underwriting expenses $ 1,867 $ 1,744 $ 1,652 7 6
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Commission expenses 18.9 % 18.3 % 18.6 % 0.6 (0.3)
Other underwriting expenses 11.2 12.2 12.2 (1.0) 0.0
Policyholder dividends 0.1 0.2 0.2 (0.1) 0.0
Total underwriting expense ratio 30.2 % 30.7 % 31.0 % (0.5) (0.3)
Consolidated property casualty commission expenses rose $126 million , or 12%, in
2021, with profit-sharing commissions for agencies increasing by $53 million .
The 2021 ratio of commission expenses as a percent of earned premiums increased
by 0.6 percentage points, compared with 2020. The 2021 ratio for other
underwriting expenses decreased by 1.0 percentage points, compared with 2020
that included a $16 million Stay-at-Home policyholder credit for personal auto
policies and higher levels of uncollectible premiums. Earned premiums rose at a
slightly faster pace than other underwriting expenses during 2021, and we
continued to carefully manage expenses while also making strategic investments
that include enhancement of underwriting expertise.
Commission expenses include our profit-sharing commissions, which are primarily
based on one-year and three-year profitability of an agency's business. The
aggregate profit trend for agencies that earn these profit-based commissions can
differ from the aggregate profit trend for all agencies reflected in our
consolidated property casualty results.
Salaries, benefits and payroll taxes for our associates account for
approximately half of our property casualty other underwriting expenses. Most of
our associates either provide direct service to the property casualty portion of
our agencies' businesses or provide support to those associates.
Discussions below of our property casualty insurance segments provide additional
details about our results.
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Commercial Lines Insurance Results
Overview - Three-Year Highlights
(Dollars in millions) Years ended December 31, 2021-2020 2020-2019
2021 2020 2019 Change % Change %
Earned premiums $ 3,674 $ 3,476 $ 3,319 6 5
Fee revenues 4 3 5 33 (40)
Total revenues 3,678 3,479 3,324 6 5
Loss and loss expenses from:
Current accident year before catastrophe
losses 2,125 2,055 2,046 3 0
Current accident year catastrophe losses 168 376 176 (55) 114
Prior accident years before catastrophe
losses (309) (81) (167) (281) 51
Prior accident years catastrophe losses (44) (14) (25) (214) 44
Loss and loss expenses 1,940 2,336 2,030 (17) 15
Underwriting expenses 1,140 1,079 1,053 6 2
Underwriting profit $ 598 $ 64 $ 241 834 (73)
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe
losses 57.8 % 59.2 % 61.7 % (1.4) (2.5)
Current accident year catastrophe losses 4.6 10.8 5.3 (6.2) 5.5
Prior accident years before catastrophe
losses (8.4) (2.3) (5.0) (6.1) 2.7
Prior accident years catastrophe losses (1.2) (0.4) (0.8) (0.8) 0.4
Loss and loss expenses 52.8 67.3 61.2 (14.5) 6.1
Underwriting expenses 31.0 31.0 31.7 0.0 (0.7)
Combined ratio 83.8 % 98.3 % 92.9 % (14.5) 5.4
Combined ratio: 83.8 % 98.3 % 92.9 % (14.5) 5.4
Contribution from catastrophe losses and
prior years
reserve development (5.0) 8.1 (0.5) (13.1) 8.6
Combined ratio before catastrophe losses
and prior years
reserve development 88.8 % 90.2 % 93.4 % (1.4) (3.2)
Commercial lines insurance segment earned premiums grew 6% in 2021. The pandemic
and a weakened economy reduced premium volume during the first quarter of 2021
and during much of 2020. A strengthening economy during the rest of 2021
contributed to net written premium growth, compared with the year-ago period.
Net written premiums grew 8% in 2021, compared with the same period of 2020,
with new business written premiums increasing 11%. New business and renewal
premium amounts could decline if the exposure basis for policy premiums, such as
sales and payrolls of businesses we insure, decrease as a result of a weakened
economy.
Loss experience for our insurance operations is influenced by many factors,
including lower catastrophe losses that contributed to lower overall commercial
lines losses in 2021. Loss experience before catastrophe effects for our
commercial lines insurance segment continued to improve during 2021. The main
driver of the improvement was the ratio for reserve development on prior
accident years before catastrophe losses. For future periods, factors that
reduce exposure to certain insurance losses, such as fewer vehicular miles
driven or reduced sales results and payrolls for businesses, could cause a
reduction in future losses that generally correspond to reduced premiums.
However, there could be losses or legal expenses that occur independent of
changes in mileage, sales or payrolls of businesses we insure, due to pandemic
effects or other factors.
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Performance highlights for the commercial lines insurance segment also included:
•Premiums - Earned premiums and net written premiums rose in 2021, including a$212 million increase in renewal written premiums that continued to include higher average pricing and a higher level of insured exposures. New business written premiums in 2021 increased$56 million , or 11%, compared with 2020. •Combined ratio - The 2021 combined ratio improved by 14.5 percentage points compared with 2020, including a 7.0 percentage-point decrease in the ratio component for catastrophe losses. Development on prior accident years' loss and loss expense reserves before catastrophes during 2021 was 6.1 percentage points more favorable than in 2020. Pricing precision and other initiatives to improve commercial lines underwriting profitability complement our business practices that continue to leverage the local presence of our field associates. Field marketing representatives meet with local agencies to assess each risk, determine limits of insurance and establish appropriate terms and conditions. They underwrite new business, with collaboration and expertise from headquarters associates as needed, while field loss control, machinery and equipment and claims representatives conduct on-site inspections. Field claims representatives also assist underwriters by preparing full reports on their first-hand observations of risk quality. Our commercial lines statutory combined ratio was 83.2% in 2021, compared with 97.5% in 2020 and 92.3% in 2019. The contribution of catastrophe losses to our commercial lines statutory combined ratio was 3.4 percentage points in 2021, 10.4 percentage points in 2020 and 4.5 percentage points in 2019. Commercial Lines Insurance Premiums (Dollars in millions) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Agency renewal written premiums$ 3,334 $ 3,122 $ 2,998 7 4 Agency new business written premiums 571 515 510 11 1 Other written premiums (94) (103) (98) 9 (5) Net written premiums 3,811 3,534 3,410 8 4 Unearned premium change (137) (58) (91) (136) 36 Earned premiums$ 3,674 $ 3,476 $ 3,319 6 5 We continue to refine our use of predictive analytics tools to improve pricing precision as we further segment commercial lines policies, emphasizing identification and retention of policies we believe have relatively stronger price adequacy. These tools better align individual insurance policy pricing to risk attributes, providing our underwriters with enhanced abilities to target profitability and to discuss pricing impacts with our agencies. We also continue to leverage our local relationships with agents through the efforts of our teams that work closely with them. We believe our field focus is unique and has several advantages, including providing us with quality intelligence on local market conditions. We seek to maintain appropriate pricing discipline for both new and renewal business as management continues to emphasize the importance of our agencies and underwriters assessing account quality to make careful decisions on a case-by-case basis whether to write or renew a policy. Premium rate credits may be used to retain renewals of quality business and to earn new business, but we do so selectively in order to avoid commercial accounts that we believe have insufficient profit margins. Our 7% increase in 2021 agency renewal written premiums included higher average pricing. We measure average changes in commercial lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies. In 2021, our standard commercial lines policies averaged an estimated pricing change at a percentage in the mid-single-digit range, similar to 2020. Our average commercial lines pricing change includes the flat pricing effect of certain coverages within package policies written for a three-year term that were in force but did not expire during the period being measured. Therefore, the average commercial lines pricing change we report reflects a blend of policies that did not expire and other policies that did expire during the measurement period. Cincinnati Financial Corporation - 2021 10-K - Page 68 -------------------------------------------------------------------------------- For only those commercial lines policies that did expire and were then renewed during 2021, we estimate that the average price increase was near the high end of the mid-single-digit range. During 2021, we continued to further segment our commercial lines policies, emphasizing identification and retention of policies we believed had relatively stronger price adequacy. Conversely, we continued to seek more aggressive renewal terms and conditions on policies we believed had relatively weaker pricing, in turn retaining fewer of those policies. Changes in the economy can affect insured exposures that directly relate to premium amounts charged for some policies. For commercial accounts, we usually calculate initial estimates for general liability premiums based on estimated sales or payroll volume, while we calculate workers' compensation premiums based on estimated payroll volume. A change in sales or payroll volume generally indicates a change in demand for a business's goods or services, as well as a change in its exposure to risk. Policyholderswho experience sales or payroll volume changes due to economic factors may also have other exposures requiring insurance, such as commercial auto or commercial property. Premium levels for these other types of coverages generally are not linked directly to sales or payroll volumes. Premiums resulting from audits of actual sales or payrolls that confirmed or adjusted initial premium estimates are part of net written premiums and earned premiums. The contribution to our commercial lines earned premiums was$47 million ,$41 million and$65 million in 2021, 2020 and 2019, respectively. The contribution on a net written premium basis was$44 million ,$53 million and$65 million in 2021, 2020 and 2019, respectively. These net written premium amounts are included with agency renewal written premiums in the Commercial Lines Insurance Premiums table above. In 2021, our commercial lines new business premiums written by our agencies increased$56 million , or 11%, compared with 2020. New business premium volume in recent years has been significantly influenced by new agency appointments. Agencies appointed since the beginning of 2020 produced commercial lines new business written premiums of$53 million , in aggregate, during 2021, up$41 million from what they produced during 2020. All other agencies contributed the remaining$518 million , up$15 million from the$503 million they produced in 2020. For new business, our field associates are frequently in our agents' offices to: help judge the quality of each account; emphasize theCincinnati value proposition; call on sales prospects with those agents; carefully evaluate risk exposure; and provide their best quotes. Some of our new business comes from accounts that are not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that is new to us and the agency. As we appoint new agencieswho choose to move accounts to us, we report these accounts as new business to us.
Other written premiums primarily consist of premiums that are ceded to
reinsurers and lower our net written premiums. An increase in ceded premiums
reduced net written premium growth by
Cincinnati Financial Corporation - 2021 10-K - Page 69 --------------------------------------------------------------------------------
Commercial Lines Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. Most of the incurred losses and loss expenses shown in the commercial lines insurance segment three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than half of our commercial lines insurance segment current accident year incurred losses and loss expenses represents net paid amounts, the majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about development on the related claims. The table below illustrates that development. For example, the 70.0% accident year 2020 loss and loss expense ratio reported as ofDecember 31, 2020 , developed favorably by 6.2 percentage points to 63.8% due to claims settling for less than previously estimated, or due to updates to reserve estimates for unpaid claims, as ofDecember 31, 2021 . Accident years 2020 and 2019 for the commercial lines insurance segment have both developed favorably, as indicated by the progression over time of the ratios in the table. (Dollars in millions) Accident year loss and loss expenses incurred and ratios to earned premiums: Accident year: 2021 2020 2019 2021 2020 2019 as of December 31, 2021$ 2,293 $ 2,216 $ 2,113 62.4 % 63.8 % 63.7 % as of December 31, 2020 2,431 2,171 70.0 65.4 as of December 31, 2019 2,222 67.0 Catastrophe losses, as discussed inConsolidated Property Casualty Insurance Results, explain some of the movement in the current accident year loss and loss expense ratio for accident year 2021, compared with 2020. Catastrophe losses added 4.6 percentage points in 2021, 10.8 points in 2020 and 5.3 points in 2019 to the respective commercial lines current accident year loss and loss expense ratios in the table above. The 57.8% ratio for current accident year loss and loss expenses before catastrophe losses for 2021 decreased 1.4 percentage points compared with the 59.2% accident year 2020 ratio measured as ofDecember 31, 2020 . The decrease was partially offset by an increase in large losses incurred, described below, and the corresponding ratios for new losses above$1 million , with a 2.2 percentage-point increase in the 2021 ratio. Other contributions included favorable effects from various initiatives, such as those to improve pricing precision and loss experience related to claims and loss control practices. Commercial lines reserve development on prior accident years of$353 million in 2021 continued to net to a favorable amount and provided a larger benefit than the$95 million recognized in 2020. The$258 million net increase in 2021, compared with 2020, included$81 million ,$66 million and$60 million from our commercial property, commercial casualty and commercial auto lines of business, respectively. Most of our commercial lines net favorable reserve development on prior accident years recognized during 2021 occurred in our commercial casualty, commercial property and workers' compensation lines of business. Favorable development recognized during 2020 and 2019 was also mostly from our commercial casualty and workers' compensation lines of business. As discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, stable historical paid loss patterns are a key assumption used to make projections necessary for estimating IBNR reserves. Development by accident year and other trends for commercial lines loss and loss expenses and the related ratios are further discussed in Liquidity and Capital Resources,Property Casualty Insurance Development of Estimated Reserves by Accident Year. Cincinnati Financial Corporation - 2021 10-K - Page 70 -------------------------------------------------------------------------------- Commercial Lines Insurance Losses by Size (Dollars in millions, net of reinsurance) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Current accident year losses greater than$5,000,000 $ 97 $ 50 $ 27 94 85 Current accident year losses$1,000,000-$5,000,000 185 135 185 37 (27) Large loss prior accident year reserve development 96 36 49 167 (27) Total large losses incurred 378 221 261 71 (15) Losses incurred but not reported (83) 240 26 nm nm Other losses excluding catastrophe losses 1,131 1,073 1,222 5 (12) Catastrophe losses 116 350 142 (67) 146 Total losses incurred$ 1,542 $ 1,884 $ 1,651 (18) 14 Ratios as a percent of earned premiums: Pt. Change Pt. Change Current accident year losses greater than$5,000,000 2.6 % 1.4 % 0.8 % 1.2 0.6 Current accident year losses$1,000,000-$5,000,000 5.0 4.0 5.6 1.0 (1.6) Large loss prior accident year reserve development 2.7 1.0 1.5 1.7 (0.5) Total large loss ratio 10.3 6.4 7.9 3.9 (1.5) Losses incurred but not reported (2.3) 6.9 0.8 (9.2) 6.1 Other losses excluding catastrophe losses 30.8 30.8 36.7 0.0 (5.9) Catastrophe losses 3.2 10.1 4.3 (6.9) 5.8 Total loss ratio 42.0 % 54.2 % 49.7 % (12.2) 4.5 In 2021, total large losses incurred increased by$157 million , or 71%, net of reinsurance. The corresponding ratio increased 3.9 percentage points. The 2021 increases on both a dollar and ratio basis were largely due to higher amounts for our commercial casualty and commercial property lines of business. In 2020, total large losses incurred and the corresponding ratio were lower than in 2019, largely due to lower amounts of large losses for our commercial casualty and commercial property lines of business. Our analysis indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs. Commercial Lines Insurance Underwriting Expenses (Dollars in millions) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Commission expenses$ 684 $ 625 $ 614 9 2 Other underwriting expenses 451 444 427 2 4 Policyholder dividends 5 10 12 (50) (17) Total underwriting expenses$ 1,140 $ 1,079 $ 1,053 6 2 Ratios as a percent of earned premiums: Pt. Change Pt. Change Commission expenses 18.6 % 18.0 % 18.5 % 0.6 (0.5) Other underwriting expenses 12.2 12.7 12.9 (0.5) (0.2) Policyholder dividends 0.2 0.3 0.3 (0.1) 0.0 Total underwriting expense ratio 31.0 % 31.0 % 31.7 % 0.0 (0.7) Commercial lines commission expenses as a percent of earned premiums increased in 2021, compared with 2020, primarily due to an increase in the ratio for profit-sharing commissions for agencies. The ratio for 2020 decreased compared with 2019, including a decrease in the ratio for profit-sharing commissions for agencies that reflected a higher amount of catastrophe losses. In 2021, other underwriting expenses as a percent of earned premiums decreased, compared with 2020, primarily due to lower levels of uncollectible premiums, in addition to ongoing expense management efforts and higher earned premiums. In 2020, other underwriting expenses as a percent of Cincinnati Financial Corporation - 2021 10-K - Page 71 --------------------------------------------------------------------------------
earned premiums decreased, compared with 2019, primarily due to a lower level of
business travel spending for associates and earned premiums that rose at a
slightly faster pace than other underwriting expense.
Commercial Lines Insurance Outlook
Renewal and new business pricing for commercial risks continues to experience
significant competitive pressure, reinforcing the need for enhanced pricing
analytics and careful risk selection. Despite challenging market conditions from
strong competition, we believe we can manage our business and execute strategic
initiatives to offset market pressures and profitably grow our commercial lines
insurance segment.
We are building commercial lines for an even larger percentage of our agencies'
total portfolio, whether through expansion of our local field presence, enhanced
expertise or flexibility in processes and service. Our goal is to provide an
industry-leading agency experience as we work to be the first and last solution
when our agencies are considering business placement.
We intend to keep marketing our products to a broad range of business classes
with a total account approach, while also continuing improvement of our pricing
precision and further segmentation among commercial lines policies. We intend to
maintain our underwriting discipline and carefully manage our rate levels as
well as our programs that seek to accurately match exposures with
appropriate premiums. We will continue to evaluate each risk on a
policy-by-policy basis, making decisions about rates, terms and conditions based
on each account's individual characteristics. We believe that our initiatives to
improve pricing precision and lower loss costs will continue to benefit
commercial lines profitability during 2022, and that recent-year premium growth
initiatives will continue to grow commercial lines premiums at a healthy pace.
Cincinnati Financial Corporation - 2021 10-K - Page 72
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Personal Lines Insurance Results
Overview - Three-Year Highlights
(Dollars in millions) Years ended December 31, 2021-2020 2020-2019
2021 2020 2019 Change % Change %
Earned premiums $ 1,542 $ 1,463 $ 1,404 5 4
Fee revenues 4 4 4 0 0
Total revenues 1,546 1,467 1,408 5 4
Loss and loss expenses from:
Current accident year before catastrophe
losses 824 762 875 8 (13)
Current accident year catastrophe losses 218 233 137 (6) 70
Prior accident years before catastrophe
losses (43) (10) (29) (330) (66)
Prior accident years catastrophe losses (7) (8) 2 13 nm
Loss and loss expenses 992 977 985 2 (1)
Underwriting expenses 457 443 415 3 7
Underwriting profit $ 97 $ 47 $ 8 106 488
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe
losses 53.4 % 52.1 % 62.4 % 1.3 (10.3)
Current accident year catastrophe losses 14.2 16.0 9.7 (1.8) 6.3
Prior accident years before catastrophe
losses (2.8) (0.7) (2.1) (2.1) 1.4
Prior accident years catastrophe losses (0.5) (0.6) 0.2 0.1 (0.8)
Loss and loss expenses 64.3 66.8 70.2 (2.5) (3.4)
Underwriting expenses 29.7 30.3 29.6 (0.6) 0.7
Combined ratio 94.0 % 97.1 % 99.8 % (3.1) (2.7)
Combined ratio: 94.0 % 97.1 % 99.8 % (3.1) (2.7)
Contribution from catastrophe losses and
prior years
reserve development 10.9 14.7 7.8 (3.8) 6.9
Combined ratio before catastrophe losses
and prior years
reserve development 83.1 % 82.4 % 92.0 % 0.7 (9.6)
The COVID-19 pandemic did not have a significant effect on our personal lines
insurance segment premiums. Loss experience for our insurance operations is
influenced by many factors. During 2021, loss experience for our personal auto
line of business drove the increase in the personal lines insurance segment loss
and loss expenses for the current accident year before catastrophe effects,
compared with 2020. Reduced driving in 2020 related to the pandemic contributed
to a reduction in reported claims, while driving patterns in 2021 moved towards
pre-pandemic levels. Because of factors that reduce exposure to certain
insurance losses, there could be a reduction in future losses that generally
corresponds to reduced premiums. However, there could be losses or legal
expenses that occur independent of changes in miles driven for autos we insure,
due to pandemic effects or other factors.
Performance highlights for the personal lines insurance segment also included:
•Premiums - Earned premiums and net written premiums continued to grow in 2021, largely due to increases in renewal written premiums that reflected higher average pricing. Renewal written premiums rose$70 million , or 5%, in 2021, compared with 2020. Net written premiums from high net worth policies in 2021 totaled approximately$663 million , compared with$519 million in 2020. •Combined ratio - The 2021 combined ratio improved by 3.1 percentage points, compared with 2020, including a 1.7 percentage-point decrease in the ratio for 2021 catastrophe losses. Development on prior accident years' loss and loss expense reserves before catastrophes during 2021 was 2.1 percentage points more favorable than in 2020.
We have increased our pricing precision and implemented numerous rate increases
in recent years to improve our personal lines insurance segment results. In
addition, we have made greater use of higher minimum loss
Cincinnati Financial Corporation - 2021 10-K - Page 73
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deductibles and enhanced our property inspection processes to verify condition
and insurance to value. We have worked to improve our geographic diversification
by expanding our personal lines operation to several states less prone
to catastrophes.
Our personal lines statutory combined ratio was 93.5% in 2021, compared with
96.4% in 2020 and 99.3% in 2019. The contribution of catastrophe losses to our
personal lines statutory combined ratio was 13.7 percentage points in 2021,
15.4 percentage points in 2020 and 9.9 percentage points in 2019.
Personal Lines Insurance Premiums
(Dollars in millions) Years ended December 31, 2021-2020 2020-2019
2021 2020 2019 Change % Change %
Agency renewal written premiums $ 1,434 $ 1,364 $ 1,312 5 4
Agency new business written premiums 202 174 158 16 10
Other written premiums (42) (35) (35) (20) 0
Net written premiums 1,594 1,503 1,435 6 5
Unearned premium change (52) (40) (31) (30) (29)
Earned premiums $ 1,542 $ 1,463 $ 1,404 5 4
Personal lines insurance is a strategic component of our overall relationship
with most of our agencies and is an important component of our agencies'
relationships with their clients. We believe agents recommend our personal
insurance products to their clients who seek to balance quality and price and
who are attracted by our superior claims service and the benefits of our package
approach. We also believe our continuing efforts to improve pricing precision
are helping us attract and retain more of our agencies' preferred business,
while also obtaining higher rates for more thinly priced business.
The 5% increase in agency renewal written premiums in 2021 reflected various
rate changes. We estimate that premium rates for our personal auto line of
business increased at average percentages near the high end of the
low-single-digit range during 2021, with some individual policies experiencing
lower or higher rate changes based on enhanced pricing precision enabled by
predictive models that consider characteristics of specific risks. For our
homeowner line of business, we estimate that rate increases during 2021 averaged
in the mid-single-digit range. Similar to our personal auto line of business,
that average varied widely by state, and some individual policies experienced
lower or higher rate changes based on pricing precision and current rate level
indications that helped determine appropriate premium rates.
Personal lines new business written premiums grew by $28 million , or 16%, during
2021, compared with 2020. We believe underwriting and pricing discipline was
maintained in recent quarters, and the growth reflects expanded use of enhanced
pricing precision tools, including excess and surplus lines homeowner policies
we began offering in early 2020. Some of what we report as new business came
from accounts that were not new to our agents. We believe our agents' seasoned
accounts tend to be priced more accurately than business that may be less
familiar to them.
Other written premiums primarily consist of premiums that are ceded to
reinsurers and lower our net written premiums. An increase in ceded premiums
reduced net written premium growth by
Cincinnati Financial Corporation - 2021 10-K - Page 74 --------------------------------------------------------------------------------
Personal Lines Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. Most of the incurred losses and loss expenses shown in the personal lines insurance segment three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since approximately two-thirds of our personal lines current accident year incurred losses and loss expenses represent net paid amounts, the remaining one-third represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 68.1% accident year 2020 loss and loss expense ratio reported as ofDecember 31, 2020 , developed favorably by 3.6 percentage points to 64.5% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as ofDecember 31, 2021 . Accident years 2020 and 2019 for the personal lines insurance segment have both developed favorably, as indicated by the progression over time for the ratios in the table. (Dollars in millions) Accident year loss and loss expenses incurred and ratios to earned premiums: Accident year: 2021 2020 2019 2021 2020 2019 as of December 31, 2021$ 1,042 $ 943 $ 990 67.6 % 64.5 % 70.6 % as of December 31, 2020 995 991 68.1 70.6 as of December 31, 2019 1,012 72.1 Catastrophe losses, as discussed inConsolidated Property Casualty Insurance Results, explain some of the movement in the current accident year loss and loss expense ratio for accident year 2021, compared with accident year 2020. Catastrophe losses added 14.2 percentage points in 2021, 16.0 points in 2020 and 9.7 points in 2019 to the respective personal lines current accident year loss and loss expense ratios in the table above. Personal lines catastrophe losses for 2021 resulted in a ratio higher than our 11.2% 10-year annual average for personal lines that included 22.8% for 2011. Personal lines catastrophe losses are inherently volatile, as discussed above and in Consolidated Property Casualty Insurance Results. The 53.4% ratio for current accident year loss and loss expenses before catastrophe losses for 2021 increased 1.3 percentage points compared with the 52.1% accident year 2020 ratio measured as ofDecember 31, 2020 . The ratio for 2020 was unusually low due to reduced driving related to the pandemic that contributed to a reduction in reported claims. The increase included a 0.6 percentage-point increase in the ratio for current accident year losses of$1 million or more per claim, shown in the table below. Other contributions included favorable effects from various initiatives, such as those to improve pricing precision and loss experience related to claims and loss control practices. Personal lines loss and loss expense reserve development on prior accident years recognized in 2021 was favorable by$50 million , in aggregate, compared with$18 million in 2020. The 2021 net favorable reserve development included$31 million for our personal auto line of business and$14 million for our homeowner line of business. The 2020 net favorable reserve development included$15 million for our personal auto line of business and$5 million for our homeowner line of business. Development by accident year and other trends for personal lines loss and loss expenses and the related ratios are further discussed in Liquidity and Capital Resources,Property Casualty Insurance Development of Estimated Reserves by Accident Year. Cincinnati Financial Corporation - 2021 10-K - Page 75 -------------------------------------------------------------------------------- Personal Lines Insurance Losses by Size (Dollars in millions, net of reinsurance) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Current accident year losses greater than$5,000,000 $ 15 $ - $ - nm nm Current accident year losses$1,000,000-$5,000,000 56 59 51 (5) 16 Large loss prior accident year reserve development (4) 6 (1) nm nm Total large losses incurred 67 65 50 3 30 Losses incurred but not reported 11 39 17 (72) 129 Other losses excluding catastrophe losses 588 523 662 12 (21) Catastrophe losses 198 216 135 (8) 60 Total losses incurred$ 864 $ 843 $ 864 2 (2) Ratios as a percent of earned premiums: Pt. Change Pt. Change Current accident year losses greater than$5,000,000 1.0 % 0.0 % 0.0 % 1.0 0.0 Current accident year losses$1,000,000-$5,000,000 3.6 4.0 3.6 (0.4) 0.4 Large loss prior accident year reserve development (0.2) 0.4 (0.1) (0.6) 0.5 Total large loss ratio 4.4 4.4 3.5 0.0 0.9 Losses incurred but not reported 0.7 2.7 1.2 (2.0) 1.5 Other losses excluding catastrophe losses 38.1 35.8 47.2 2.3 (11.4) Catastrophe losses 12.8 14.7 9.6 (1.9) 5.1 Total loss ratio 56.0 % 57.6 % 61.5 % (1.6) (3.9) In 2021, personal lines total large losses incurred increased by$2 million , or 3%, net of reinsurance. The ratio for 2021 large losses as a percent of earned premiums matched 2020. The 2021 increase on a dollar basis was primarily due to a higher amount for umbrella coverage in our other personal line of business that was partially offset by a lower amount for our homeowner line of business. In 2020, total large losses increased, compared with 2019, primarily due to higher amounts for our homeowner line of business and umbrella coverage in our other personal line of business. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs. Personal Lines Insurance Underwriting Expenses (Dollars in millions) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Commission expenses$ 292 $ 266 $ 259 10 3 Other underwriting expenses 165 177 156 (7) 13 Total underwriting expenses$ 457 $ 443 $ 415 3 7 Ratios as a percent of earned premiums: Pt. Change Pt. Change Commission expenses 19.0 % 18.2 % 18.5 % 0.8 (0.3) Other underwriting expenses 10.7 12.1 11.1 (1.4) 1.0 Total underwriting expense ratio 29.7 % 30.3 % 29.6 % (0.6) 0.7 Personal lines commission expense as a percent of earned premiums increased in 2021, compared with 2020, primarily due to an increase in the ratio for profit-sharing commissions for agencies. The ratio for 2020 decreased compared with 2019, largely due to a decrease in the ratio for profit-sharing commissions for agencies that reflected a higher amount of catastrophe losses. In 2021, other underwriting expenses as a percent of earned premiums decreased, compared with 2020 that included a$16 million Stay-at-Home policyholder credit for personal auto policies. We also continued expense management efforts in 2021 and premium growth outpaced growth in other expenses. Other underwriting expenses as a percent of earned premiums in 2020 increased, compared with 2019, primarily due to the 15% policyholder credit applied to each personal auto policy for the months of April andMay 2020 . Cincinnati Financial Corporation - 2021 10-K - Page 76 --------------------------------------------------------------------------------
Personal Lines Insurance Outlook
A.M. Best indicates 2021 personal lines direct written premiums for theU.S. property casualty industry grew approximately 5%, based on industry data reported through the first nine months of 2021. Growth for our personal lines insurance segment net written premiums in 2021 exceeded the industry by approximately one percentage point, and we believe it will likely be higher than industry projections for 2022. Drivers of our growth include rate increases, an accelerated pace of new agency appointments in recent years and increased focus on the high net worth personal lines market. Our high net worth initiative, along with various other actions to improve performance in our personal lines insurance segment, is discussed in greater detail in Personal Lines Insurance Results and also in Item 1, Our Business and Our Strategy, Strategic Initiatives and Our Segments,Personal Lines Insurance Segment.Cincinnati Financial Corporation - 2021 10-K - Page 77 --------------------------------------------------------------------------------
Excess and Surplus Lines Insurance Results
Overview - Three-Year Highlights
(Dollars in millions) Years ended December 31, 2021-2020 2020-2019
2021 2020 2019 Change % Change %
Earned premiums $ 398 $ 325 $ 278 22 17
Fee revenues 2 2 2 0 0
Total revenues 400 327 280 22 17
Loss and loss expenses from:
Current accident year before catastrophe
losses 240 187 152 28 23
Current accident year catastrophe losses 3 5 1 (40) 400
Prior accident years before catastrophe
losses 7 7 (11) 0 nm
Prior accident years catastrophe losses - - - 0 0
Loss and loss expenses 250 199 142 26 40
Underwriting expenses 106 94 85 13 11
Underwriting profit $ 44 $ 34 $ 53 29 (36)
Ratios as a percent of earned premiums: Pt. Change Pt. Change
Current accident year before catastrophe
losses 60.3 % 57.7 % 54.6 % 2.6 3.1
Current accident year catastrophe losses 0.6 1.3 0.4 (0.7) 0.9
Prior accident years before catastrophe
losses 1.9 2.1 (4.1) (0.2) 6.2
Prior accident years catastrophe losses 0.0 0.2 0.2 (0.2) 0.0
Loss and loss expenses 62.8 61.3 51.1 1.5 10.2
Underwriting expenses 26.7 28.7 30.4 (2.0) (1.7)
Combined ratio 89.5 % 90.0 % 81.5 % (0.5) 8.5
Combined ratio: 89.5 % 90.0 % 81.5 % (0.5) 8.5
Contribution from catastrophe losses and
prior years
reserve development 2.5 3.6 (3.5) (1.1) 7.1
Combined ratio before catastrophe losses
and prior years
reserve development 87.0 % 86.4 % 85.0 % 0.6 1.4
The COVID-19 pandemic did not have a significant effect on our excess and
surplus lines insurance segment premiums during 2021, as net written premiums
grew 22%. Premium growth could slow significantly if the basis for policy
premiums, such as the sales results of businesses we insure, decrease as a
result of a weakened economy.
Loss experience for our insurance operations is influenced by many factors. We have not determined any material effect on our excess and surplus lines insurance loss experience for 2021 as a result of the pandemic. Because of factors that reduce exposure to certain insurance losses, such as reduced sales results for businesses, there could be a reduction in future losses that generally corresponds to reduced premiums. However, there could be losses or legal expenses that occur independent of changes in sales of businesses we insure, due to pandemic effects or other factors.
Our excess and surplus lines insurance segment includes results of
Cincinnati Specialty Underwriters Insurance Company
Inc.
•Premiums - Earned premiums and net written premiums continued to grow during
2021, including higher renewal written premiums that included average renewal
estimated price increases in the high-single-digit range. New business written
premiums rose 13% in 2021, compared with 2020, and also contributed to premium
growth.
•Combined ratio - The combined ratio improved by 0.5 percentage points in 2021,
as lower ratios for underwriting expenses and catastrophe losses offset higher
current accident year losses and loss expenses before catastrophes. The higher
current accident year losses and loss expenses before catastrophes reflected
what we believe are now adequate reserves for estimated ultimate losses and loss
expenses, as claims on average are
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remaining open longer than previously expected. Components of the 2.4
percentage-point increase in 2021 for the total of loss and loss expense ratios
before catastrophe losses, shown in the table above, include an IBNR portion
that increased by 6.5 points and a case incurred portion that decreased by 4.1
points. The paid component of the case incurred portion decreased by 3.8
percentage points.
Excess and Surplus Lines Insurance Premiums
(Dollars in millions) Years ended December 31, 2021-2020 2020-2019
2021 2020 2019 Change % Change %
Agency renewal written premiums $ 323 $ 254 $ 209 27 22
Agency new business written premiums 124 110 110 13 0
Other written premiums (21) (16) (16) (31) 0
Net written premiums 426 348 303 22 15
Unearned premium change (28) (23) (25) (22) 8
Earned premiums $ 398 $ 325 $ 278 22 17
The $69 million increase in 2021 renewal premiums reflected the opportunity to
renew many policies for the first time as well as higher renewal pricing.
Average renewal estimated price increases were in the high-single-digit range
during 2021. We measure average changes in excess and surplus lines renewal
pricing as the rate of change in renewal premium for the new policy period
compared with the premium for the expiring policy period, assuming no change in
the level of insured exposures or policy coverage between those periods for
respective policies.
New business written premiums grew by $14 million during 2021, compared with
2020, as we continued to carefully underwrite each policy in a highly
competitive market. Lack of growth in 2020 was largely due to our underwriters
seeing fewer opportunities to write policies with annual premiums of $10,000 or
more at pricing levels that we believed were adequate. Other written premiums in
2021 reduced net written premium growth by $5 million more than in 2020, and are
primarily premiums that are ceded to reinsurers and therefore reduce our net
written premiums.
Excess and Surplus Lines Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses, as well as the associated loss expenses. The majority of the total incurred losses and loss expenses shown above in the three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than 20% of our excess and surplus lines current accident year incurred losses and loss expenses represents net paid amounts, a large majority represents reserves for our estimate of unpaid losses and loss expenses. These reserves develop over time, and we update our estimates of previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 55.0% accident year 2019 loss and loss expense ratio reported as ofDecember 31, 2019 , developed favorably by 0.7 percentage points to 54.3% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as ofDecember 31, 2020 . Accident year 2019 for this segment developed unfavorably during 2021, as indicated by the progression over time of the ratios in the table. (Dollars in millions) Accident year loss and loss expenses incurred and ratios to earned premiums: Accident year: 2021 2020 2019 2021 2020 2019 as of December 31, 2021$ 243 $ 192 $ 158 60.9 % 59.0 % 56.9 % as of December 31, 2020 192 151 59.0 54.3 as of December 31, 2019 153 55.0 Catastrophe losses, as discussed inConsolidated Property Casualty Insurance Results, explain some of the movement among components of the current accident year loss and loss expense ratio for accident year 2021, compared with 2020. Catastrophe losses added 0.6 percentage points in 2021, 1.3 percentage points in 2020 and 0.4 percentage points in 2019 to the respective excess and surplus lines current accident year loss and loss expense ratios in the table above. Cincinnati Financial Corporation - 2021 10-K - Page 79 -------------------------------------------------------------------------------- The 60.3% ratio for current accident year loss and loss expenses before catastrophe losses for 2021 increased by 2.6 percentage points compared with the 57.7% accident year 2020 ratio measured as ofDecember 31, 2020 . The increase included a 1.6 percentage-point increase in the ratio for current accident year losses of$1 million or more per claim, shown in the table below. Excess and surplus lines reserve development on prior accident years was a net unfavorable$7 million for both 2020 and 2021. Nearly all of the net amount for 2021 was for accident year 2019. The unfavorable reserve development on prior accident years reflected what we believe are now adequate reserves for estimated ultimate losses and loss expenses, as claims on average are remaining open longer than previously expected. We believe the loss and loss expense reserves for our excess and surplus lines business are adequate. The amount of outstanding reserves for our excess and surplus lines operation can be seen in a table in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves. One indication of how long it takes for most of the outstanding reserves to be settled is to measure outstanding reserves by accident year at different points in time, using Item 8, Note 4 of the Consolidated Financial Statements. For example, for accident years 2014, 2013 and 2012, in aggregate, after subtracting cumulative paid amounts from incurred amounts atDecember 31, 2014 , reserves for estimated unpaid losses, plus the portion of loss expenses known as ALAE, equaled$168 million . For those same accident years, atDecember 31, 2021 , the reserve estimate for the remaining unpaid amount equaled$7 million . The inherent uncertainty in estimating reserves is discussed in Liquidity and Capital Resources, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves. Development trends by accident year are further discussed inProperty Casualty Insurance Development of Estimated Reserves by Accident Year. Excess and Surplus Lines Insurance Losses by Size (Dollars in millions, net of reinsurance) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Current accident year losses greater than$5,000,000 $ - $ - $ - nm nm Current accident year losses$1,000,000-$5,000,000 16 8 7 100 14 Large loss prior accident year reserve development 3 - 2 nm (100) Total large losses incurred 19 8 9 138 (11) Losses incurred but not reported 53 31 7 71 343 Other losses excluding catastrophe losses 97 95 76 2 25 Catastrophe losses 2 5 2 (60) 150 Total losses incurred$ 171 $ 139 $ 94 23 48 Ratios as a percent of earned premiums: Pt. Change Pt. Change Current accident year losses greater than$5,000,000 0.0 % 0.0 % 0.0 % 0.0 0.0 Current accident year losses$1,000,000-$5,000,000 4.1 2.5 2.5 1.6 0.0 Large loss prior accident year reserve development 0.6 0.0 0.6 0.6 (0.6) Total large loss ratio 4.7 2.5 3.1 2.2 (0.6) Losses incurred but not reported 13.4 9.5 2.4 3.9 7.1 Other losses excluding catastrophe losses 24.3 29.3 27.7 (5.0) 1.6 Catastrophe losses 0.6 1.4 0.5 (0.8) 0.9 Total loss ratio 43.0 % 42.7 % 33.7 % 0.3 9.0 In 2021, total large losses increased by$11 million , net of reinsurance. The ratio for 2021 large losses as a percent of earned premiums increased by 2.2 percentage points. That ratio for 2020 decreased by 0.6 points, compared with 2019. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs. Cincinnati Financial Corporation - 2021 10-K - Page 80 -------------------------------------------------------------------------------- Excess and Surplus Lines Insurance Underwriting Expenses (Dollars in millions) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Commission expenses$ 70 $ 58 $ 53 21 9 Other underwriting expenses 36 36 32 0 13 Total underwriting expenses$ 106 $ 94 $ 85 13 11 Ratios as a percent of earned premiums: Pt. Change Pt. Change Commission expenses 17.5 % 17.6 % 18.9 % (0.1) (1.3) Other underwriting expenses 9.2 11.1 11.5 (1.9) (0.4) Total underwriting expenses ratio 26.7 % 28.7 % 30.4 % (2.0) (1.7) Excess and surplus lines commission expense as a percent of earned premiums for 2021 decreased slightly compared with 2020, despite a slight increase in the ratio for profit-sharing commissions for agencies. The ratio for 2020 decreased compared with 2019, largely due to a decrease in the ratio for profit-sharing commissions for agencies. The ratio for other underwriting expenses decreased in 2021, largely due to ongoing expense management efforts and premium growth outpacing growth in expenses. In 2020, the ratio decreased, reflecting lower levels of business travel spending for associates, in addition to higher earned premiums and ongoing expense management efforts.
Excess and Surplus Lines Outlook
The excess and surplus lines market is expected to see the magnitude of rate increases moderate for risks that are casualty-driven. For property risks involving catastrophe exposures, premium rates in the foreseeable future are expected to be firm. New business opportunities are expected to increase as standard market insurance companies continue to re-underwrite business they previously took from the excess and surplus lines market and as larger excess and surplus lines companies re-underwrite their business with an emphasis on underwriting profitability. Firming is expected to continue for specific classes of business where loss costs are exceeding rates, such as habitational for property and general liability coverages, liquor liability for general liability coverages and hired and non-owned for general liability coverages. Industry reports suggest that there are opportunities for profitability and growth through greater use of technology. Technology and data are also being used by excess and surplus lines insurance companies to identify new exposures in emerging businesses that need insurance protection or other value-added services. Our strategy of providing superior service is expected to continue to grow our excess and surplus lines insurance segment and to achieve profitability despite challenging market conditions. We intend to keep carefully selecting and pricing risks, providing prompt delivery of insurance quotes and policies and giving outstanding claims and loss control service from local field representativeswho also handle the standard lines business for their assigned agencies. These local representatives are supported by headquarters underwriters and claims managerswho specialize in excess and surplus lines.Cincinnati Financial Corporation - 2021 10-K - Page 81 --------------------------------------------------------------------------------
Life Insurance Results
Overview - Three-Year Highlights
(Dollars in millions) Years ended December 31, 2021-2020 2020-2019
2021 2020 2019 Change % Change %
Earned premiums $ 298 $ 289 $ 270 3 7
Fee revenues 5 2 4 150 (50)
Total revenues 303 291 274 4 6
Contract holders' benefits incurred 340 297 286 14 4
Investment interest credited to
contract holders (105) (102) (99) (3) (3)
Underwriting expenses incurred 84 85 86 (1) (1)
Total benefits and expenses 319 280 273 14 3
Life insurance segment profit (loss)
$ 1 nm nm The COVID-19 pandemic did not have a significant effect on our life insurance segment earned premiums or underwriting expenses in 2021. However, the pandemic did contribute to an increase in death claims during 2021. It is possible we may continue to experience higher than projected future death claims due to the pandemic.
Performance highlights for the life insurance segment also included:
•Revenues - Earned premiums rose 3% for the year 2021, as shown in the table below that includes details by major line of business. Our largest life insurance product line, term life insurance, rose 7%. Net in-force policy face amounts rose 5% to$77.493 billion at year-end 2021 from$73.475 billion at year-end 2020 and$69.984 billion at year-end 2019. •Profitability - The life insurance segment frequently reports only a small profit or loss because most of its investment income is included in the investments segment results. We include only investment income credited to contract holders (interest assumed in life insurance policy reserve calculations) in life insurance segment results. A$16 million loss for our life insurance segment in 2021, compared with a profit of$11 million in 2020 and$1 million in 2019, was primarily due to less favorable mortality results as a result of higher death claims. The life insurance segment has averaged an annual profit of less than$1 million over the past five years. Earned premiums rose$9 million in 2021, primarily due to growth in our term life insurance business, as shown in the table below. Growth in 2020 was also primarily due to term life insurance. Universal life insurance earned premiums can vary, including from changes in interest rate or other actuarial assumptions, and decreased by$5 million in 2021 after increasing$5 million in 2020. (Dollars in millions) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Term life insurance$ 210 $ 197 $ 186 7 6 Universal life insurance 39 44 39 (11) 13 Other life insurance and annuity products 49 48 45 2 7 Net earned premiums$ 298 $ 289 $ 270 3 7 Products we market include term, whole and universal life insurance and also fixed annuities. In addition, we offer term and whole life insurance to employees at their worksite. These products provide our property casualty agency force with excellent cross-serving opportunities for both commercial and personal accounts. Over the past several years, we have worked to maintain a portfolio of simple, yet competitive, products. Our product development efforts emphasize death benefit protection and guarantees. Distribution expansion within our property casualty insurance agencies remains a high priority. Our 34 life field marketing representatives work in partnership with our property casualty field marketing representatives. Approximately 65% of our term and other life insurance product premiums were generated through our property casualty insurance agency relationships. Cincinnati Financial Corporation - 2021 10-K - Page 82 --------------------------------------------------------------------------------
Life insurance segment expenses consist principally of:
•Contract holders' benefits incurred, related to traditional life and interest-sensitive products, accounted for 80.2% of 2021 total benefits and expenses compared with 77.7% in 2020 and 76.9% in 2019. Total contract holders' benefits increased as net death claims were higher in 2021, compared with 2020, and were above our mortality projections. •Underwriting expenses incurred, net of deferred acquisition costs, accounted for 19.8% of 2021 total benefits and expenses compared with 22.3% in 2020 and 23.1% in 2019. Expenses in 2021 decreased by 1%, compared with 3% growth in earned premiums. Expenses in 2020 also decreased 1%, compared with 7% growth in earned premiums. In both 2021 and 2020, unlocking of interest rate and other actuarial assumptions decreased the amount of expenses deferred to future periods, increasing underwriting expenses. Life insurance segment profitability depends largely on premium levels, the adequacy of product pricing, underwriting skill and operating efficiencies. This segment's results include only investment interest credited to contract holders (interest assumed in life insurance policy reserve calculations). The remaining investment income is reported in the investments segment results. The life investment portfolio is managed to earn target spreads between earned investment rates on general account assets and rates credited to policyholders. We consider the value of assets under management and investment income for the life investment portfolio as key performance indicators for the life insurance segment. We seek to maintain a competitive advantage with respect to benefits paid and reserve increases by consistently achieving better than average claims experience due to skilled underwriting. We recognize that assets under management, capital appreciation and investment income are integral to evaluation of the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and investment gains or losses from life insurance-related invested assets, our life insurance subsidiary reported net income of$44 million in 2021, compared with$32 million in 2020 and$39 million in 2019. The life insurance subsidiary portfolio had after-tax net investment gains of$8 million in 2021 and after-tax net investment losses of$21 million in 2020 and$4 million in 2019. Investment gains and losses are discussed under Investments Results. We exclude most of our life insurance company investment income from investments segment results. Life Insurance Outlook The desire for our products remains strong, influenced in no small part by the COVID-19 waves we continue to endure. Millennials and Generation Z are now more inclined to consider life insurance than ever before, and we believe the independent agent is best-positioned to sell it to them. We will continue to benefit from new distribution as our property casualty company appoints new agencies across the country. The voluntary life insurance market remains strong as well. We plan to expand our enrollment services with both internal and external options for our property casualty agencies to choose from if they are unable to do it themselves.
Inflation is raising the possibility that the yield curve will be on the rise.
While it will take time for an increase to have a material effect on our
investment income, it would bode well for pricing. We also will monitor
legislation to change the tax code and will position our products accordingly.
Cincinnati Financial Corporation - 2021 10-K - Page 83 --------------------------------------------------------------------------------
Investments Results
Overview - Three-Year Highlights
Investments Results
(Dollars in millions) Years ended December 31, 2021-2020 2020-2019
2021 2020 2019 Change % Change %
Total investment income, net of expenses $ 714 $ 670 $ 646 7 4
Investment interest credited to contract
holders (105) (102) (99) (3) (3)
Investment gains and losses, net 2,409 865 1,650 178 (48)
Investments profit, pretax $ 3,018 $ 1,433 $ 2,197 111 (35)
We believe the COVID-19 pandemic did not have a significant effect on our
investments results in 2021. During 2020, the COVID-19 pandemic and related
economic effects caused volatility in fair values of securities. Our
fixed-maturity and equity portfolios experienced a decrease in valuation during
the first quarter of 2020, in large part due to the volatility and economic
uncertainty caused by the coronavirus outbreak that affected various sectors of
our portfolio. During the first quarter of 2020, already low oil prices and the
sudden demand drop in related products due to governmental actions, such as
shelter-in-place orders, contributed to the energy sector accounting for most of
the write-downs of impaired securities in the tables below. During the last
three quarters of 2020, valuations increased for a significant portion of our
fixed-maturity and equity portfolios.
The investments segment contributes investment income and investments gains and
losses to results of operations. Investment income is generally our primary
source of pretax and after-tax profits.
•Investment income - Pretax investment income grew$44 million , or 7%, in 2021, due to increases from dividends and interest income. Dividend income grew 12%, reflecting rising dividend rates and net purchases of equity securities from available funds. Interest income grew 5% in 2021, compared with 2020, as net purchases of fixed-maturity securities offset the continuing effects of the low interest rate environment on bond yields. Pretax investment income rose 4% in 2020, including increases in interest and dividend income. Average yields in the investment income table below are based on the average invested asset and cash amounts indicated in the table using fixed-maturity securities valued at amortized cost and all other securities at fair value. •Investment gains and losses - We reported an investment gain in 2021, 2020 and 2019, primarily due to favorable changes in fair values of equity securities even though we continue to hold the securities or as otherwise required by GAAP. We believe it is useful to analyze our overall investment performance by using total investment return over several years. Total investment return considers changes in unrealized gains and losses that are not included in net income, in addition to net investment income and investment gains and losses that are included in net income. Changes in unrealized gains and losses shown in the table below include other invested assets. Considering total investment gains and losses over several years helps evaluate performance since gains and losses may experience typical variability during shorter periods of time. Cincinnati Financial Corporation - 2021 10-K - Page 84 -------------------------------------------------------------------------------- The table below shows total return based on assumptions that simplify cash flow timing that is commonly used in total return measures. This simplified calculation uses data shown in our consolidated financial statements or notes to those statements. Added to invested asset amounts from our consolidated balance sheets are 50% of annual amounts pertaining to invested asset categories included in net cash used in investing activities from our consolidated statements of cash flows. The cash flow amounts are reduced by net gains from investment portfolio securities sales or called bonds, with the net result reduced by 50% to represent estimated new cash invested during each respective year. All new cash is assumed to be invested at the midpoint of the year. Total investment return of 13.1% in 2021 was 3.3 percentage points more than in 2020. Both the 2021 and 2020 contributions from the investment income component were enhanced by the net favorable effect of the investment gains and losses components. Comparing contributions for 2021 with 2020, investment income rose$44 million , investment gains were$1.544 billion more favorable and the invested assets change in unrealized gains and losses decreased by$670 million . The base component of the return calculation, annual average invested assets, was up 10% in 2021. For 2020 compared with 2019, total investment return decreased by 6.8 percentage points, primarily due to a less favorable net effect of the investment gains and losses. The base component of the return calculation, annual average invested assets, increased 17% in 2020. (Dollars in millions) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Invested assets beginning balance: Fixed maturities$ 12,338 $ 11,698 $ 10,689 5 9 Equity securities 8,856 7,752 5,920 14 31 Other invested assets 348 296 123 18 141 Invested assets beginning balance 21,542 19,746 16,732 9 18 Average acquisitions (dispositions), net 538 309 343 74 (10) Annual average invested assets$ 22,080 $ 20,055 $ 17,075 10 17 Total investment return: Investment income, net of expenses$ 714 $ 670 $ 646 7 4 Investment gains and losses, net 2,409 865 1,650 178 (48) Total invested assets change in unrealized gains and losses (234) 436 544 nm (20) Total$ 2,889 $ 1,971 $ 2,840 47 (31) Total return on invested assets, pretax 13.1 % 9.8 % 16.6 % Cincinnati Financial Corporation - 2021 10-K - Page 85
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Investment Income
The primary drivers of investment income are highlighted below, followed by
additional details of our investment results.
•Interest income increased by$22 million , or 5%, in 2021, compared with 2020. The average fixed-maturity pretax yield declined by approximately 1 basis point but was offset by a larger average fixed-maturity portfolio that rose 8% on an amortized cost basis. Interest income in 2020 increased by$9 million , compared with 2019, when that yield declined by approximately 4 basis points while the portfolio rose 2% on an amortized cost basis. •Dividend income rose$26 million , or 12%, in 2021, after rising 9% in 2020. Increases in dividend payment rates for most of the holdings in our common stock portfolio during both 2021 and 2020 drove the increases in dividend income. An increase in funds invested in that portfolio during both 2021 and 2020 also favorably affected dividend income. (Dollars in millions) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change % Investment income: Interest$ 477 $ 455 $ 446 5 2 Dividends 246 220 201 12 9 Other 5 8 12 (38) (33) Less investment expenses 14 13 13 8 0 Investment income, pretax 714 670 646 7 4 Less income taxes 111 104 101 7 3 Total investment income, after-tax$ 603 $ 566 $ 545 7 4 Investment returns: Average invested assets plus cash and cash equivalents$ 23,215 $ 20,670 $ 18,697 Average yield pretax 3.08 % 3.24 % 3.46 % Average yield after-tax 2.60 2.74 2.91 Effective tax rate 15.5 15.5 15.6 Fixed-maturity returns: Average amortized cost$ 11,771 $ 11,210 $ 10,876 Average yield pretax 4.05 % 4.06 % 4.10 % Average yield after-tax 3.37 3.39 3.42 Effective tax rate 16.8 16.6 16.6 In 2021, we continued to invest available cash flow in both fixed income and equity securities in a manner that we believe balances current income needs with longer-term invested asset growth goals. While our bond portfolio more than covers our insurance reserve liabilities, we believe our diversified common stock portfolio of mainly blue chip, dividend-paying companies represents one of our best investment opportunities for the long term. We position our portfolio with consideration to both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield. Cincinnati Financial Corporation - 2021 10-K - Page 86 -------------------------------------------------------------------------------- The table below summarizes pretax yield to amortized costs excluding any book value adjustments due to impairment for bonds in our fixed-maturity portfolio by various maturity periods. Principal At December 31, 2021 % Yield redemptions Fixed-maturity yield profile: Expected to mature during 2022 3.65 % $ 771 Expected to mature during 2023 3.78 809 Expected to mature during 2024 4.27 1,024
Average yield and total expected redemptions from 2022 through 2024
3.94
The average pretax yield of 3.47% for fixed-maturity securities acquired during
2021, shown in the table below, was lower than the 4.02% average
yield-to-amortized cost of the fixed-maturity securities portfolio at the end of
2021.
Years ended
2021 2020
Average pretax yield-to-amortized cost on new fixed maturities:
Acquired taxable fixed maturities
3.52 % 4.23 %
Acquired tax-exempt fixed maturities 2.65 2.71
Average total fixed maturities acquired 3.47 3.97
We discussed our portfolio strategies in Item 1, Investments Segment. We discuss
risks related to our investment income and our fixed-maturity and equity
investment portfolios in Item 7a, Quantitative and Qualitative Disclosures About
Market Risk.
Cincinnati Financial Corporation - 2021 10-K - Page 87
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Total Investment Gains and Losses
Investment gains and losses are recognized on the sales of investments, for certain changes in fair values of securities even though we continue to hold the securities or as otherwise required by GAAP. The change in fair value for equity securities still held is reported in net income, as disclosed in Note 1, Summary of Significant Accounting Policies. Total investment gains and losses in 2021 included$2.278 billion of gains from the recognition of fair value changes of equity securities still held that prior to 2018 would have been reported in other comprehensive income (OCI) instead of net income. Change in unrealized gains or losses for fixed-maturity securities are included as a component of OCI. Accounting requirements for the allowance for credit losses and other-than-temporary impairment (OTTI) charges for the fixed-maturity portfolio are disclosed in Item 8, Note 1, Summary of Significant Accounting Policies. The factors we consider when evaluating impairments are also discussed in Critical Accounting Estimates, Asset Impairment. The timing of gains or losses from sales can have a material effect on results in any given period. However, such gains or losses usually have little, if any, effect on total shareholders' equity because most equity and fixed-maturity investments are carried at fair value. As appropriate, we buy, hold or sell both fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We generally purchase fixed-maturity securities with the intention to hold until maturity. If they no longer meet our investment criteria, they are divested. Sales of fixed-maturity securities are usually due to a change in credit fundamentals. Pretax total investment gains in 2021, 2020 and 2019 were largely due to favorable changes in fair values of equity securities even though we continue to hold the securities. Additional information about investment gains or losses is included in Item 8, Note 2 of the Consolidated Financial Statements.
The table below summarizes total investment gains and losses, before taxes.
(Dollars in millions)
Years ended
2021 2020 2019
Investment gains and losses
Equity securities:
Investment gains and losses on securities sold,
net $ 4 $ 79 $ 26
Unrealized gains and losses on securities still
held, net 2,278 841 1,626
Subtotal 2,282 920 1,652
Fixed-maturity securities: Gross realized gains 36 16 13 Gross realized losses (5) (3) (3) Write-down of impaired securities (1) (78) (9) Subtotal 30 (65) 1 Other 97 10 (3) Total investment gains and losses reported in net income$ 2,409 $ 865 $ 1,650 Change in unrealized investment gains and losses reported in OCI Fixed-maturity securities (234) 436 544 Total$ 2,175 $ 1,301 $ 2,194 Cincinnati Financial Corporation - 2021 10-K - Page 88 -------------------------------------------------------------------------------- Write-downs of impaired securities or OTTI charges from the investment portfolio by the asset classes we described in Item 1, Our Segments, Investments Segment, are summarized below: (Dollars in millions) Years ended December 31, 2021 2020 2019 Taxable fixed maturities: Impairment amount $ -$ 77 $ 9 New amortized cost $ -$ 78 $ 20 Percent to total amortized cost owned - % 1 % - % Number of impaired securities written down - 13 3 Percent to number of securities owned - % 2 % - % Tax-exempt fixed maturities: Impairment amount$ 1 $ 1 $ - New amortized cost$ 2 $ 1 $ - Percent to total amortized cost owned - % - % - % Number of impaired securities written down 5 1 - Percent to number of securities owned - % - % - % Totals: Impairment amount$ 1 $ 78 $ 9 New amortized cost$ 2 $ 79 $ 20 Percent to total amortized cost owned - % 1 % - % Number of impaired securities written down 5 14 3 Percent to number of securities owned - %
1 % - %
Write-downs of impaired securities or OTTI charges from the investment portfolio
by industry are summarized as follows:
(Dollars in millions) Years ended December 31,
2021 2020 2019
Fixed maturities:
Energy $ - $ 62 $ 6
Real estate - 13 3
Consumer goods - 1 -
Municipal 1 1 -
Technology & Electronics - 1 -
Total fixed maturities $ 1 $ 78 $ 9
Cincinnati Financial Corporation - 2021 10-K - Page 89 --------------------------------------------------------------------------------
Investments Outlook
The year 2021 saw a continuation of the economic recovery that began in the second half of 2020. Most bond markets experienced declines as interest rates rose. In 2022, we will likely see theFederal Reserve take rate actions that could further pressure existing bond values while at the same time provide opportunities to invest at potentially higher yields. Periods in which the central bank moves to a less accommodating or tightening position can also lead to increased equity market volatility. We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth. In 2022, we expect to continue to allocate a portion of cash available for investment to equity securities, taking into consideration corporate liquidity and income requirements, as well as insurance department regulations and rating agency comments. We discuss our portfolio strategies in Item 1, Our Segments, Investments Segment.Cincinnati Financial Corporation - 2021 10-K - Page 90 --------------------------------------------------------------------------------
Other
Total revenues in 2021 and 2020 for our Other operations increased, compared
with the respective prior-year periods, primarily due to earned premiums of
Cincinnati Re and Cincinnati Global. Other also includes noninvestment
operations of the parent company and its commercial leasing and financial
services subsidiary,
increased in 2021 and 2020, primarily due to losses and loss expenses and
underwriting expenses from Cincinnati Re and Cincinnati Global.
Other loss in the table below represents losses before income taxes. For each year shown, Other loss was largely driven by interest expense from debt of the parent company. Net results for the combination of Cincinnati Re andCincinnati Global were an underwriting loss of approximately$8 million in 2021 and$26 million in 2020 and an underwriting profit of approximately$39 million in 2019. The underwriting loss in 2020 included$31 million of pandemic-related incurred losses and expenses, as discussed in Corporate Financial Highlights of Management's Discussion and Analysis. (Dollars in millions) Years ended December 31, 2021-2020 2020-2019 2021 2020 2019 Change % Change %
Interest and fees on loans and leases
$ 5 17 20 Earned premiums 570 427 333 33 28 Other revenues 3 4 4 (25) 0 Total revenues 580 437 342 33 28 Interest expense 53 54 53 (2) 2 Loss and loss expenses 414 325 195 27 67 Underwriting expenses 164 128 99 28 29 Operating expenses 20 20 23 0 (13) Total expenses 651 527 370 24 42 Other loss$ (71) $ (90) $ (28) 21 (221) Cincinnati Financial Corporation - 2021 10-K - Page 91 --------------------------------------------------------------------------------
Taxes
We had a$724 million income tax expense in 2021, compared with$283 million in 2020 and$475 million in 2019. The corporate effective tax rate for 2021 was 19.7% compared with 18.9% in 2020 and 19.2% in 2019.
The changes in our effective tax rate between periods were primarily due to
large changes in our net investment gains and losses, included in income for the
periods, as well as changes in underwriting income.
Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See Item 1, Our Segments, Fixed-Maturity Securities Investments, for further discussion on municipal bond purchases in our fixed-maturity investment portfolio. For tax years after 2017, for our property casualty insurance subsidiaries, approximately 75% of interest from tax-advantaged, fixed-maturity investments and approximately 40% of dividends from qualified equities are exempt from federal tax after applying proration. For our noninsurance companies, the dividend received deduction exempts 50% of dividends from qualified equities. Our life insurance company does not own tax-advantaged, fixed-maturity investments or equities subject to the dividend received deduction.
Our effective tax rate reconciliation is found in Item 8, Note 11 of the
Consolidated Financial Statements.
Cincinnati Financial Corporation - 2021 10-K - Page 92 --------------------------------------------------------------------------------
Liquidity and Capital Resources
We seek to maintain prudent levels of liquidity and financial strength for the protection of our policyholders, creditors and shareholders. We manage liquidity at two levels to meet the short- and long-term cash requirements of business obligations and growth needs. The first is the liquidity of the parent company. The second is the liquidity of our lead insurance subsidiary. Management of liquidity at both levels is essential because each has different funding needs and sources, and each is subject to certain regulatory guidelines and requirements. We believe the COVID-19 pandemic did not have a significant effect on our cash flows during 2021. In addition to our historically positive operating cash flow to meet the needs of operations, we have the ability to slow investing activities if such need arises or sell a portion of our high-quality, liquid investment portfolio. We also have additional capacity to borrow on our revolving short-term line of credit, as described further below.
Parent Company Liquidity
AtDecember 31, 2021 , the parent company had$5.053 billion in cash and marketable securities, providing strong liquidity to fund cash outflows, as needed. The payment of dividends to shareholders is largely based upon receiving subsidiary dividends. Alternatively, we could sell investments or use our line of credit to support the dividend payment. The parent company's primary sources of cash inflows are dividends from our lead insurance subsidiary, investment income and sale proceeds from investments. The parent company's cash outflows are primarily interest and principal payments on long- and short-term debt, dividends to shareholders, common stock repurchases, deposits at Lloyd's and general operating expenses. The table below shows a summary, by the direct cash flow method, of the major sources and uses of cash flow of the parent company. (Dollars in millions) Years ended December 31, 2021 2020 2019 Sources of liquidity: Subsidiary dividends received$ 598 $ 550 $ 625 Investment income received 90 81 75 Proceeds from stock options exercised 13 7
11
Return of funds on deposit from Lloyd's 117 5
-
Uses of liquidity: Shareholders' dividend payments$ 395 $ 375 $ 355 Share repurchases 144 261 67 Debt interest payments 52 54 52 Payment of funds on deposit at Lloyd's 14 47
67
We expect 2022 parent company sources of cash flow to be similar to 2021. Use of
liquidity for share repurchases are discretionary depending on cash availability
and capital management decisions. In addition, the subsidiaries have the
discretion to pay dividends to the parent company. Cincinnati Global is required
to maintain certain capital funding requirements with Lloyd's, which the parent
company may deposit on their behalf. These funding requirements may fluctuate
based on the profitability of Cincinnati Global and syndicate solvency capital
requirements as set by Lloyd's, which may result in return of funds on deposit.
Other than share repurchases and funding at Lloyd's, the majority of
expenditures for the parent company have been consistent during the last three
years, and we expect future expenditures to remain stable.
Cincinnati Financial Corporation - 2021 10-K - Page 93
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Insurance Subsidiary Liquidity
The parent company's lead insurance subsidiary largely represents the operations of the property casualty segments. The primary sources of cash inflows are collection of premiums, investment income, maturity of fixed-income securities and sale proceeds from investments. Property casualty insurance premiums generally are received before losses are paid under the policies purchased with those premiums. Cash outflows are primarily loss and loss expenses, commissions, salaries, taxes, operating expenses and investment purchases. Over the three-year period endedDecember 31, 2021 , premium receipts and investment income have been more than sufficient to pay claims and operating expenses. Excess cash flows were partially used to pay dividends to the parent company. We are not aware of any known trends that would materially change historical cash flow results, other than fluctuations in catastrophe claims and other large losses, either individually or in aggregate. The table below shows a summary of operating cash flow for property casualty insurance (direct method). Historically, annual variation in operating cash flow has been largely related to changes in amounts of catastrophe losses. (Dollars in millions) Years ended December 31, 2021 2020 2019 Premiums collected$ 6,309 $ 5,828 $ 5,495 Loss and loss expenses paid (3,094) (3,183) (3,260) Commissions and other underwriting expenses paid (1,842) (1,785) (1,639) Cash flow from underwriting 1,373 860 596 Investment income received 497 456 451 Cash flow from operations$ 1,870 $ 1,316 $ 1,047 Other Sources of Liquidity Cash in excess of operating requirements is invested in fixed-maturity and equity securities. Cash generated from investment income provides an important investment contribution to cash flow and liquidity. The sale of investments could provide an additional source of liquidity at either the parent company or insurance subsidiary level, if required. In addition to possible sales of investments, proceeds of calls or maturities of fixed-maturity securities also can provide liquidity. During the five-year period beginning in 2022, fair value of$4.568 billion , or 35.1%, of our fixed-maturity portfolio is scheduled to mature. AtDecember 31, 2021 , we had$10.862 billion of common stock securities, with$4.774 billion , or 44.0%, held by the parent company. Financial resources of the parent company also could be made available to our insurance subsidiaries, if circumstances required it. This flexibility would include our ability to access the capital markets and short-term bank borrowings. We generally have minimized our reliance on debt financing, although we may use the line of credit to fund short-term cash needs. Cincinnati Financial Corporation - 2021 10-K - Page 94 --------------------------------------------------------------------------------
Long-Term Debt
We provide details of our three long-term notes in Item 8, Note 8 of the Consolidated Financial Statements. None of the notes are encumbered by rating triggers. The total principal amount of our long-term debt atDecember 31, 2021 , was$793 million and included:
•$28 million aggregate principal amount of 6.900% senior debentures due 2028.
•$391 million aggregate principal amount of 6.920% senior debentures due 2028.
•$374 million aggregate principal amount of 6.125% senior debentures due 2034.
The company's senior debt is rated investment grade by four independent rating agencies. None of the rating agencies made changes to our debt ratings in 2021. AtFebruary 23, 2022 , our debt ratings from the rating agencies were: a fromA.M. Best , A- from Fitch, A3 from Moody's and BBB+ from S&P.
Note Payable
AtDecember 31, 2021 , we had a$300 million line of credit with commercial banks, with$54 million borrowed at bothDecember 31, 2021 and 2020. That unsecured revolving line of credit has an accordion feature giving us the option to double the$300 million amount, under the same terms and conditions. Terms and conditions of the agreement include a debt-to-total capital maximum of 35% and the agreement has no net worth covenant. It was due to expire onFebruary 4, 2024 , with the option of two one-year extensions. We exercised both one-year options to extend the term of the line of credit by two additional years toFebruary 4, 2026 . At year-end 2021, we were in compliance with all covenants under the credit agreement and believe we will remain in compliance. The credit agreement provides alternative interest charges based on the type of borrowing and our debt rating. The interest rate charged is adjusted LIBOR plus an applicable margin. The agreement contains successor LIBOR rate language, which will require an amendment to reflect the new replacement rate. We could be impacted to the extent the replacement rate differs materially from the LIBOR rate. Capital Resources Capital resources, consisting of shareholders' equity and total debt, represent our overall financial strength to support current obligations and growth in our insurance businesses. AtDecember 31, 2021 , we had total capital of$13.948 billion . Shareholders' equity was$13.105 billion , an increase of$2.316 billion , or 21%, from the prior year. Our total debt was$843 million , up$1 million from a year ago. We seek to maintain a solid financial position and provide capital flexibility by keeping our ratio of debt to total capital moderate. At year-end 2021, the ratio was 6.0%, compared with 7.2% at year-end 2020. At times we enter into letter of credit agreements to support our Cincinnati Re and Cincinnati Global operations. We have an unsecured letter of credit agreement to provide a portion of the capital needed to supportCincinnati Global's obligations at Lloyd's. The amount of this unsecured letter of credit agreement was$94 million with no amounts drawn atDecember 31, 2021 .
At the discretion of the board of directors, the company can return capital
directly to shareholders as discussed below.
•Dividends to shareholders - The ability of our company to continue paying cash dividends is subject to factors the board of directors deems relevant. While the board and management believe there is merit to sustaining the company's long record of dividend increases, our first priority is the company's financial strength. Over the past 10 years, the company has paid an average of 51% of net income as dividends. Through 2021, the board had increased our cash dividend for 61 consecutive years. The board's decision inJanuary 2022 to increase the dividend demonstrated confidence in the company's strong capital, liquidity, financial flexibility and initiatives to grow earnings. •Common stock repurchase - Generally, our board believes that share repurchases can help fulfill our commitment to enhancing shareholder value. Consequently, the board has authorized the repurchase of outstanding shares, giving management discretion to purchase shares at reasonable prices in light of circumstances at the time of purchase. Our approach has been to hold capital adequate to support future growth of our insurance operations and repurchase shares at management's discretion. Repurchases are intended to offset the issuance of shares through equity compensation plans, primarily due to vesting of service-based restricted stock units of equity awards granted in the past. The amount of future repurchases may be more, or less, than the past, depending on circumstances and discretion exercised by management. Our corporate Code of Conduct restrictsCincinnati Financial Corporation - 2021 10-K - Page 95 --------------------------------------------------------------------------------
repurchases during certain time periods. The details of the repurchase
authorizations and activity are described in Item 5, Market for the Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of
Obligations We pay obligations to customers, suppliers and associates in the normal course of our business operations. Some are contractual obligations that define the amount, circumstances and/or timing of payments. We have other commitments for business expenditures; such as$294 million we expect to fund for our private equity and real estate investments, however, the amount, circumstances and/or timing of our other commitments are not dictated by contractual arrangements.
Contractual Obligations
At
obligations as follows:
(Dollars in millions) Year Years There- Payment due by period 2022 2023-2026 after Total Gross property casualty loss and loss expense payments$ 2,627 $ 3,695 $ 907 $ 7,229 Gross life policyholder obligations 87 335 5,500 5,922 Long-term debt - - 793 793 Interest on long-term debt 52 208 215 475 Profit-sharing commissions 195 - - 195 Other liabilities 122 40 5 167 Total$ 3,083 $ 4,278 $ 7,420 $ 14,781
Liquidity and Capital Resources Outlook
AtDecember 31, 2021 , we had$1.139 billion in cash and cash equivalents. During 2022, our lead insurance subsidiary may pay$929 million in dividends to our parent company without regulatory approval. That strong liquidity and our consistent cash flows give us the flexibility to meet current obligations and commitments while building value by prudently investing where we see potential for both current income and long-term return. Our cash and cash equivalents provide adequate financial cushion when short-term operating results do not meet our objectives. A long-term perspective governs our liquidity and capital resources decisions, with the goal of benefiting our policyholders, agents, shareholders and associates over time. 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 95% to 100%. Our GAAP combined ratio averaged 94.8% over the five-year period 2017 through 2021, resulting in strong underwriting profits. In any year, we consider the most likely source of pressure on liquidity would be an unusually high level of catastrophe loss payments within a short period of time. There could be additional obligations for our insurance operations due to increasing severity or frequency of noncatastrophe claims. To address the risk of unusually large insurance loss obligations, including catastrophe events, we maintain property casualty reinsurance contracts with highly rated reinsurers, as discussed under 2022 Reinsurance Ceded Programs. We also monitor the financial condition of our reinsurers because their insolvency could jeopardize a portion of our$570 million reinsurance recoverable asset atDecember 31, 2021 . Parent-company liquidity could also be constrained byOhio regulatory requirements that restrict the dividends insurance subsidiaries can pay. Economic weakness also has the potential to affect our liquidity and capital resources in a number of different ways, including delinquent payments from agencies, defaults on interest payments by fixed-maturity holdings in our portfolio, dividend reductions by holdings in our equity portfolio or declines in the market value of holdings in our portfolio.Cincinnati Financial Corporation - 2021 10-K - Page 96 --------------------------------------------------------------------------------
LIBOR Discontinuation
We have identified our population of contracts that contain a LIBOR reference and determined our exposure to be minimal. Our identification is primarily related to our line of credit, an unsecured letter of credit agreement to provide a portion of the capital needed to support obligations at Lloyd's, investments in floating rate securities and late fee provisions. We will continue to work with counterparties to determine alternative rates for each contract identified.
Off-Balance-Sheet Arrangements
We do not use any special-purpose financing vehicles or have any undisclosed off-balance-sheet arrangements (as that term is defined in applicableSEC rules) that are reasonably likely to have a current or future material effect on the company's financial condition, results of operation, liquidity, capital expenditures or capital resources.
Property Casualty Loss and Loss Expense Obligations and Reserves
Our estimate of future gross property casualty loss and loss expense payments of$7.229 billion is lower than loss and loss expense reserves of$7.305 billion reported on our balance sheet atDecember 31, 2021 . The$76 million difference is due to certain life and health loss reserves. Reserving practices are discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves. For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines insurance segment and for other parts of our property casualty insurance operations, the following table details gross reserves among case, IBNR and loss expense reserves, net of salvage and subrogation. The$552 million increase in total gross reserves was primarily due to a$307 million increase in case loss reserves and a$178 million increase in IBNR loss reserves. The increase in total gross reserves included$125 million for our commercial casualty line of business,$131 million for excess and surplus lines and$216 million for Cincinnati Re. Cincinnati Financial Corporation - 2021 10-K - Page 97 -------------------------------------------------------------------------------- Property Casualty Gross Loss and Loss Expense Reserves (Dollars in millions) Loss reserves Case IBNR Loss expense Total gross Percent of reserves reserves reserves reserves total AtDecember 31, 2021 Commercial lines insurance: Commercial casualty$ 1,059 $ 734 $ 704 $ 2,497 34.5 % Commercial property 357 82 62 501 6.9 Commercial auto 419 220 124 763 10.6 Workers' compensation 442 503 85 1,030 14.3 Other commercial 91 9 116 216 3.0 Subtotal 2,368 1,548 1,091 5,007 69.3 Personal lines insurance: Personal auto 211 53 60 324 4.5 Homeowner 168 102 44 314 4.3 Other personal 84 87 5 176 2.4 Subtotal 463 242 109 814 11.2 Excess and surplus lines 233 186 158 577 8.0 Cincinnati Re 117 460 5 582 8.1 Cincinnati Global 150 97 2 249 3.4 Total$ 3,331 $ 2,533 $ 1,365 $ 7,229 100.0 % At December 31, 2020 Commercial lines insurance: Commercial casualty$ 955 $ 764 $ 653 $ 2,372 35.5 % Commercial property 338 127 69 534 8.0 Commercial auto 391 209 141 741 11.1 Workers' compensation 402 534 89 1,025 15.4 Other commercial 92 13 104 209 3.1 Subtotal 2,178 1,647 1,056 4,881 73.1 Personal lines insurance: Personal auto 205 56 68 329 4.9 Homeowner 166 47 41 254 3.8 Other personal 61 90 5 156 2.3 Subtotal 432 193 114 739 11.0 Excess and surplus lines 190 133 123 446 6.7 Cincinnati Re 77 287 2 366 5.5 Cincinnati Global 147 95 3 245 3.7 Total$ 3,024 $ 2,355 $ 1,298 $ 6,677 100.0 % Cincinnati Financial Corporation - 2021 10-K - Page 98 --------------------------------------------------------------------------------
Asbestos and Environmental Loss and Loss Expense Reserves
We carried$88 million of net loss and loss expense reserves for asbestos and environmental claims at year-end 2021, compared with$85 million year-end 2020. The asbestos and environmental claims amounts for each respective year constituted 1.3% of total net loss and loss expense reserves at these year-end dates. We believe our exposure to asbestos and environmental claims is limited, largely because our reinsurance retention was$500,000 or below prior to 1987. We also were predominantly a personal lines company in the 1960s and 1970s, when asbestos and pollution exclusions were not widely used by commercial lines insurers. During the 1980s and early 1990s, commercial lines grew as a percentage of our overall business and our exposure to asbestos and environmental claims grew accordingly. Over that period, we endorsed to or included in most policies an asbestos and environmental exclusion. Additionally, since 2002, we have revised policy terms where permitted by state regulation to limit our exposure to mold claims prospectively and further reduce our exposure to other environmental claims generally. Finally, we have not engaged in any mergers or acquisitions through which such a liability could have been assumed. We continue to monitor our claims for evidence of material exposure to other mass tort classes, but we have found no such credible evidence to date. Reserving data for asbestos and environmental claims has characteristics that limit the usefulness of the methods and models used to analyze loss and loss expense reserves for other claims. Specifically, asbestos and environmental loss and loss expenses for different accident years do not emerge independently of one another as loss development and Bornhuetter-Ferguson methods assume. In addition, asbestos and environmental loss and loss expense data available to date did not reflect a well-defined tail, greatly complicating the identification of an appropriate probabilistic trend family model. At year-end 2021, we used a weighted average of a paid survival ratio method and report year method to estimate reserves for IBNR asbestos and environmental claims. Our exposure to such claims is limited; we believe a weighted average of both methods produces a sufficient level of reserves.
Gross Property Casualty Loss and Loss Expense Payments
While we believe that historical performance of property casualty and life loss payment patterns is a reasonable source for projecting future claim payments, there is inherent uncertainty in this estimate of contractual obligations. We believe that we could meet our obligations under a significant and unexpected change in the timing of these payments because of the liquidity of our invested assets, strong financial position and access to lines of credit. Our estimates of gross property casualty loss and loss expense payments do not include reinsurance receivables or ceded losses. As discussed in 2022 Reinsurance Ceded Programs, we purchase reinsurance to mitigate our property casualty risk exposure. Ceded property casualty reinsurance unpaid receivables of$327 million at year-end 2021 are an offset to our gross property casualty loss and loss expense obligations. Our reinsurance program mitigates the liquidity risk of a single large loss or an unexpected rise in claim severity or frequency due to a catastrophic event. Reinsurance does not relieve us of our obligation to pay covered claims. The financial strength of our reinsurers is important because our ability to recover losses under our reinsurance agreements depends on the financial viability of the reinsurers. We direct our associates to settle claims and pay losses as quickly as is practical, and we made$3.094 billion of net claim payments during 2021. At year-end 2021, total net property casualty reserves of$6.902 billion reflected$3.133 billion in unpaid amounts on reported claims (case reserves),$1.352 billion in loss expense reserves and$2.417 billion in estimates of claims that were incurred but had not yet been reported (IBNR). The specific amounts and timing of obligations related to case reserves and associated loss expenses are not set contractually. The amounts and timing of obligations for IBNR claims and related loss expenses are unknown. We discuss our methods of establishing loss and loss expense reserves and our belief that reserves are adequate in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves.Cincinnati Financial Corporation - 2021 10-K - Page 99 -------------------------------------------------------------------------------- The historical pattern of using premium receipts for the payment of loss and loss expenses has enabled us to extend slightly the maturities of our investment portfolio beyond the estimated settlement date of the loss reserves. The effective duration of our consolidated property casualty fixed-maturity portfolio was 4.5 years at year-end 2021. By contrast, the duration of our loss and loss expense reserves was approximately 3.1 years. We believe this difference in duration does not affect our ability to meet current obligations because cash flow from operations is sufficient to meet these obligations. In addition, investment holdings could be sold, if necessary, to meet higher than anticipated loss and loss expenses.
Range of Reasonable Reserves
The company established a reasonably likely range for net loss and loss expense reserves of$6.446 billion to$7.014 billion at year-end 2021, with the company carrying net reserves of$6.902 billion . The range was$5.859 billion to$6.543 billion at year-end 2020, with the company carrying net reserves of$6.400 billion . Our loss and loss expense reserves are not discounted for the time-value of money, but we have reduced the reserves by an estimate of the amount of salvage and subrogation payments we expect to recover. The low point of each year's range corresponds to approximately one standard error below each year's mean reserve estimate, while the high point corresponds to approximately one standard error above each year's mean reserve estimate. We discussed management's reasons for basing reasonably likely reserve ranges on standard errors in Critical Accounting Estimates, Reserve Estimate Variability.
The ranges reflect our assessment of the most likely unpaid loss and loss
expenses at year-end 2021 and 2020. However, actual unpaid loss and loss
expenses could nonetheless fall outside of the indicated ranges.
Management's best estimate of total loss and loss expense reserves as of
year-end 2021 and 2020 was consistent with the corresponding actuarial best
estimate.
Cincinnati Financial Corporation - 2021 10-K - Page 100
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The following table shows net reserve changes at year-end 2021, 2020 and 2019 by
property casualty segment and accident year:
(Dollars in millions) Commercial Personal E&S
lines lines lines Other Totals
As of December 31, 2021
2020 accident year $ (215) $ (52) $ - $ (16) $ (283)
2019 accident year (58) - 7 (5) (56)
2018 accident year (42) 5 - (7) (44)
2017 accident year (19) 4 1 2 (12)
2016 accident year (11) (1) 1 (6) (17)
2015 accident year - (1) (1) - (2)
2014 and prior accident years (8) (5) (1) - (14)
(Favorable)/unfavorable $ (353) $ (50) $ 7 $ (32) $ (428)
As of December 31, 2020
2019 accident year $ (51) $ (22) $ (2) $ (5) $ (80)
2018 accident year (44) (3) - (9) (56)
2017 accident year (4) 3 (1) (6) (8)
2016 accident year 4 1 8 (5) 8
2015 accident year (10) - 1 - (9)
2014 accident year 4 1 1 - 6
2013 and prior accident years 6 2 - - 8
(Favorable)/unfavorable $ (95) $ (18) $ 7 $ (25) $ (131)
As of December 31, 2019
2018 accident year $ (67) $ (10) $ (6) $ (7) $ (90)
2017 accident year (48) (6) (1) (6) (61)
2016 accident year (4) (5) (1) (5) (15)
2015 accident year (27) (1) (1) - (29)
2014 accident year (16) (3) (1) - (20)
2013 accident year (16) (2) (1) - (19)
2012 and prior accident years (14) - - - (14)
(Favorable)/unfavorable $ (192) $ (27) $ (11) $ (18) $ (248)
Overall favorable development for consolidated property casualty reserves of
$428 million in 2021 illustrated the potential for revisions inherent in
estimating reserves, especially for long-tail lines such as commercial casualty
and workers' compensation. As noted in Critical Accounting Estimates, Key
Assumptions Loss Reserving, our models predict that actual loss and loss expense
emergence will differ from projections, and we do not attempt to monitor or
identify such normal variations. The table in Property Casualty Loss and Loss
Expense Obligations and Reserves shows reserves by segment and lines of business
and the components of gross reserves among case, IBNR and loss expense reserves.
Cincinnati Financial Corporation - 2021 10-K - Page 101
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Favorable reserve development was $120 million for our commercial casualty line
of business, $97 million for our commercial property line of business and
$66 million for our workers' compensation line of business, together accounting
for approximately 66% of the overall total. Drivers of significant reserve
development typically reflect loss emergence on known claims that was more
favorable or less favorable than previously anticipated for various lines of
business and are discussed below.
•Commercial casualty - During 2021 and 2020, we continued to experience
favorable development on prior accident years in aggregate. We continue to watch
this line so we can detect unfavorable trends should they reoccur.
•Workers' compensation - We continue to see favorable reserve development, for all prior accident years in aggregate. During 2021 and 2020, the trend for estimated payments to be made in future calendar years was stable compared with 2019. However, we continue to monitor this line closely, as a sudden increase in trend for future payments has a highly leveraged effect. •Commercial auto - Ultimate losses developed favorably during calendar year 2021, for all prior accident years in aggregate, after several years of unfavorable reserve development. During theU.S. economic recession several years ago, slowing business activity influenced our estimates of reserves for ultimate losses and loss expenses during that period. As the economy recovered, we believe we were slow to recognize some of the higher loss cost effects in reserve estimates for at least part of that period. As claims that occurred during that period have become more mature, loss cost trends resulted in increased estimated ultimate losses for the accident years impacted by the recession. In consideration of the data's credibility, we analyze commercial and personal umbrella liability reserves together and then allocate the derived total reserve estimate to the commercial and personal coverages. Consequently, the umbrella factors that contributed to commercial lines reserve development also contributed to personal lines reserve development through the other personal line, of which personal umbrella coverages are a part. For the excess and surplus lines insurance segment, the table showing reserves by segment and lines of business in Property Casualty Loss and Loss Expense Obligations and Reserves, shows the components of gross reserves among case, IBNR and loss expense reserves. Total gross reserves increased$131 million from year-end 2020, largely due to the increase in premiums and exposures for this segment, as we discussed in Excess and Surplus Lines Insurance Results. More prudent reserving, as claims on average are remaining open longer than previously expected, also contributed to the increase. Adverse, or unfavorable, reserve development netted to$7 million during 2021, following adverse development during 2020 of$7 million for excess and surplus lines insurance segment reserves, shown in the table above, illustrates the potential for revisions inherent in estimating reserves.Cincinnati Financial Corporation - 2021 10-K - Page 102 --------------------------------------------------------------------------------
Life Insurance Policyholder Obligations and Reserves
Gross Life Insurance Policyholder Obligations
Our estimates of life, annuity and disability policyholder obligations reflect future estimated cash payments to be made to policyholders for future policy benefits, policyholders' account balances and separate account liabilities. These estimates include death and disability income claims, policy surrenders, policy maturities, annuity payments, minimum guarantees on separate account products, commissions and premium taxes offset by expected future deposits and premiums on in-force contracts. Further, these estimates are based on mortality, morbidity and lapse assumptions reflective of our recent experience and expectations of future payment obligations. Our estimates of gross life, annuity and disability obligations do not reflect net recoveries from reinsurance agreements. Ceded life reinsurance receivables were$214 million at year-end 2021. As discussed in 2022 Reinsurance Programs, we purchase reinsurance to mitigate our life insurance risk exposure. At year-end 2021, ceded death benefits represented approximately 33.6% of our total gross policy face amounts in force. These estimated cash outflows are undiscounted with respect to interest. As a result, the sum of the cash outflows for all years of$5.922 billion (total of life insurance obligations) exceeds the liabilities recorded in life policy and investment contract reserves and separate accounts for future policy benefits and claims of$3.960 billion (total of life insurance policy reserves and separate account policy reserves). A significant portion of the difference can be attributed to the time value of money and changes in mortality, morbidity and lapse assumptions between the date the liabilities were originally established and the current date. We have made significant assumptions to determine the estimated undiscounted cash flows of these policies and contracts that include mortality, morbidity, timing of claims, future lapse rates and interest crediting rates. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. Life Insurance Reserves Gross life policy reserves were$3.014 billion at year-end 2021, compared with$2.915 billion at year-end 2020. The increase was primarily due to reserves for traditional life insurance contracts. We establish reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates 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 and morbidity. We use our own experience and historical trends for setting our assumptions for expected withdrawal rates and expenses. We base our assumptions for expected investment income on our own experience adjusted for current and future expected economic conditions. We establish reserves for our universal life, deferred annuity and investment contracts equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life insurance 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.
We regularly review our life insurance business to ensure that any deferred
acquisition cost associated with the business is recoverable and that our
actuarial liabilities (life insurance segment reserves) make sufficient
provision for future benefits and related expenses.
Cincinnati Financial Corporation - 2021 10-K - Page 103 --------------------------------------------------------------------------------
2022 Reinsurance Ceded Programs
A single large loss or an unexpected rise in claims severity or frequency due to a catastrophic event is a risk to the company's liquidity and financial strength. To control such losses, we limit marketing property casualty insurance in specific geographic areas and monitor our exposure in certain coastal regions. Examples of this include the reduction in recent years of our homeowner policies in the southeasternU.S. coastal region or limiting our earthquake writings in theNew Madrid region. Loss exposures in these areas have been identified as a major contributor to our catastrophe probable maximum loss estimates. The table below includes probable maximum loss estimates for the peril of hurricane. These estimates were subsequently reduced, in large part due to less exposure from southeasternU.S. homeowner policies. We also continually review aggregate exposures to large disasters and purchase reinsurance protection to cover these exposures. For business other than Cincinnati Re and Cincinnati Global, we use theRisk Management Solutions (RMS) and Applied Insurance Research (AIR) models to evaluate exposures to a once-in-a-100-year and a once-in-a-250-year event to help determine appropriate reinsurance coverage programs. In conjunction with these activities, we also continue to evaluate information provided by our reinsurance broker. Examples include deterministic modeling of probable maximum loss contribution from growth in new geographic territories. To help determine appropriate reinsurance coverage for hurricane, earthquake and tornado/hail exposures, for business other than Cincinnati Re andCincinnati Global we use the RMS and AIR models to estimate the probable maximum loss from a single event or multiple events occurring in a one-year period. The models are proprietary in nature, and the vendors that provide them periodically update the models, sometimes resulting in significant changes to their estimate of probable maximum loss. As of the end of 2021, both models indicated that a hurricane event represents our largest amount of exposure to losses. The table below summarizes estimated probabilities and the corresponding probable maximum loss from a single hurricane event occurring in a one-year period, for business other than Cincinnati Re and Cincinnati Global, and indicates the effect of such losses on consolidated shareholders' equity atDecember 31, 2021 . Net losses are net of reinsurance, estimated reinstatement premiums and income taxes, assuming a 21% federal tax rate, and assume our 2022 reinsurance programs apply. (Dollars in millions) RMS Model AIR Model Percent Percent Gross Net of total Gross Net of total Probability at December 31, 2021 losses losses equity losses losses equity 2.0% (1 in 50 year event)$ 427 $ 168 1.3 %$ 455 $ 169 1.3 % 1.0% (1 in 100 year event) 682 204 1.6 692 202 1.5 0.4% (1 in 250 year event) 1,161 468 3.6 1,084 386 2.9 0.2% (1 in 500 year event) 1,638 842 6.4 1,482 689 5.3 The modeled losses according to RMS in the table are based on its RiskLink version 18.1 catastrophe model and use a long-term storm catalog methodology. The modeled losses according to AIR in the table are based on its AIR Touchstone® version 8.2.5 catastrophe model and use a long-term methodology. The AIR and RMS storm catalogs include decades of documented weather events used in simulations for probable maximum loss projections. Reinsurance mitigates the risk of highly uncertain exposures and limits the maximum net loss that can arise from large risks or risks concentrated in areas of exposure. Management's decisions about the appropriate structure of reinsurance protection and level of risk retention are affected by various factors, including changes in our underwriting practices, capacity to retain risks and reinsurance market conditions. Reinsurance does not relieve us of our obligation to pay covered claims. The financial strength of our reinsurers is important because our ability to recover for losses covered under any reinsurance agreement depends on the financial viability of the reinsurer. Cincinnati Financial Corporation - 2021 10-K - Page 104 -------------------------------------------------------------------------------- For 2022, the primary participants on our standard market property and casualty per-risk and per-occurrence reinsurance ceded programs includeMunich Reinsurance America , Hannover Re,Swiss Reinsurance America Corporation ,Partner Reinsurance Company of theU.S. andTransatlantic Reinsurance Company , all of which hadA.M. Best insurer financial strength ratings of A (Excellent) or better as ofDecember 31, 2021 . Our property catastrophe program is subscribed through a broker by reinsurers fromthe United States ,Bermuda ,London and the European markets. The largest participant in our property catastrophe program, representing approximately 28% of total participation, is theLloyd's of London placement that features numerous syndicates. Some of the other reinsurers with large participation in the program includeLancashire Insurance Company Limited , Mapfre Re,Partner Reinsurance Company Ltd. andR&V Versicherung AG . The following table shows our five largest property casualty reinsurance receivable amounts by reinsurer at year-end 2021 and 2020.Michigan Catastrophic Claims Association is a mandatory nonprofit association which runs a reinsurance program funded by an annual premium assessment per vehicle. This assessment coversMichigan's automobile no-fault policies, which provide unlimited lifetime coverage for medical expenses resulting from auto accidents. TheA.M. Best insurer financial strength ratings as of the end of the two most recent years are also shown for each of those reinsurers that have an applicable rating. (Dollars in millions) 2021 2020 Total A.M. Best Total A.M. Best Name of reinsurer receivable Rating receivable Rating Munich Reinsurance America$ 52 A+$ 44 A+ Swiss Reinsurance America Corporation 41 A+ 41 A+ Michigan Catastrophic Claims Association 39 NA 39 NA General Reinsurance Corporation 30 A++ 28 A++ Hartford Steam Boiler Inspection & Insurance Company 23 A++ 14 A++ Cincinnati Financial Corporation - 2021 10-K - Page 105
-------------------------------------------------------------------------------- Primary components of the 2022 property and casualty reinsurance program are summarized below. The premium estimates below occurred near the beginning of each respective year, when direct written premiums that were subject to applicable reinsurance treaties were also estimated. •Property per risk treaty - The primary purpose of the property treaty is to provide capacity up to$50 million , adequate for the majority of the risks we write. It also includes protection for extra-contractual liability coverage losses. We retain the first$10 million of each loss. Losses between$10 million and$50 million are reinsured at 100%. The 2022 ceded premium estimate was$41 million , compared with$36 million for the 2021 estimate. •Property excess treaty - We purchased a property reinsurance treaty that provides an additional$50 million in protection for certain property losses. This treaty, along with the property per risk treaty, provides a total of$100 million of protection. The 2022 ceded premium estimate was approximately$4 million , essentially unchanged from the 2021 estimate. •Casualty per occurrence treaty - The casualty treaty provides capacity up to$25 million . Similar to the property treaty, it provides sufficient capacity to cover the vast majority of casualty accounts we insure and also includes protection for extra-contractual liability coverage losses. We retain the first$10 million of each loss. Losses between$10 million and$25 million are reinsured at 100%. The 2022 ceded premium estimate was$15 million , compared with$13 million for the 2021 estimate. •Casualty excess treaty - We purchase a casualty reinsurance treaty that provides an additional$45 million in protection for certain casualty losses. This treaty, along with the casualty per occurrence treaty, provides a total of$70 million of protection for workers' compensation, extra-contractual liability coverage and clash coverage losses, which would apply when a single occurrence involves multiple policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The 2022 ceded premium estimate was approximately$3 million , essentially unchanged from the 2021 estimate. •Property catastrophe treaty - To protect against catastrophic events such as wind and hail, hurricanes or earthquakes, we purchased property catastrophe reinsurance with a limit up to$900 million . To promote pricing stability over changing market conditions, parts of this treaty are written on a multi-year basis. This treaty and our property and casualty treaties contain exclusions for communicable disease and cyber losses. Aggregation of losses into one event, sometimes referred to as an hours clause, varies by peril. For example, the general provision in this treaty is 168 hours, but it is 120 hours for a wind event and 96 hours for a riot or civil commotion event. Losses from the same occurrence can be aggregated into one limit over the hour period applicable to the peril causing the loss and applied to the treaty towards recovery. The treaty contains one reinstatement provision. The 2022 ceded premium estimate was$47 million , compared with$47 million for the 2021 estimate. We retain the first$100 million of any loss, and a share of losses up to$900 million . The percentage share we retain for each layer of coverage is indicated below: •54.4% of losses between$100 million and$200 million
•14.6% of losses between
•10.1% of losses between
•10.6% of losses between
•23.1% of losses between
•52.9% of losses between
•EffectiveJune 1, 2021 , we nonrenewed our combined property catastrophe occurrence excess of loss treaty that provided coverage for business written on a direct basis and by Cincinnati Re. We determined that the coverage was no longer cost effective. A restructured reinsurance program became effective for Cincinnati Re only, providing retrocession coverages with various triggers and unique features. That program included property catastrophe excess of loss coverage with a total available aggregate limit of$48 million in excess of$80 million per loss. Coverage for Cincinnati Re only with a total available aggregate limit of$30 million expired during the second quarter of 2021.Cincinnati Financial Corporation - 2021 10-K - Page 106 -------------------------------------------------------------------------------- After reinsurance, our maximum exposure to a catastrophic event that causes$900 million in covered losses in 2022 would be$299 million , compared with our retention of$202 million for 2021 for an event causing$800 million in covered losses. The largest catastrophe loss event in our history occurred during 2011 from aMay 20-27 storm system that included a tornado inJoplin, Missouri , and that also included significant losses from hail in theDayton, Ohio , area. Our losses from that storm were estimated to be$226 million before reinsurance, based on updated estimates as ofDecember 31, 2017 . Individual risks with insured values in excess of$100 million , as identified in the policy, are handled through a different reinsurance mechanism. We typically reinsure property coverage for individual risks with insured values between$100 million and$225 million under an automatic facultative agreement. For risks with property values exceeding$225 million , we negotiate the purchase of facultative coverage on an individual certificate basis. For casualty coverage on individual risks with limits exceeding$25 million , facultative reinsurance coverage is placed on an individual certificate basis. For risks with casualty limits that are between$25 million and$27 million , we sometimes forego facultative reinsurance and retain an additional$2 million of loss exposure. Terrorism coverage at various levels has been secured in most of our reinsurance agreements. The broadest coverage for this peril is found in the property and casualty working treaties, the property per risk treaty and the casualty per occurrence treaty, which provide coverage for commercial and personal risks. Our property catastrophe treaty provides terrorism coverage for personal risks, and coverage for commercial risks with total insured values of$15 million or less. For insured values between$15 million and$100 million , there also may be coverage in the property working treaty. A form of reinsurance is also provided through The Terrorism Risk Insurance Act of 2002 (TRIA). TRIA was originally signed into law onNovember 26, 2002 , and extended on several occasions. The most recent extension was signed into law onDecember 20, 2019 , and is scheduled to expire onDecember 31, 2027 . TRIA provides a temporary federal backstop for losses related to the writing of the terrorism peril in property casualty insurance policies. Under regulations promulgated under this statute, insurers are required to offer terrorism coverage for certain lines of property casualty insurance, including property, commercial multi-peril, fire, ocean marine, inland marine, liability, aircraft and workers' compensation. In the event of a terrorism event defined by TRIA, the federal government would reimburse terrorism claim payments subject to the insurer's deductible. The deductible is calculated as a percentage of subject written premiums for the preceding calendar year. Our deductible in 2021 was$610 million (20% of 2020 subject premiums), and we estimate it is$658 million (20% of 2021 subject premiums) for 2022. Reinsurance protection for the company's surety business is covered under a separate treaty with many of the same reinsurers that write the property casualty working treaties. Reinsurance protection for cyber coverage is also through a separate treaty. We offer cyber insurance as an affirmative coverage option on various insurance policies written on a direct basis and subsequently cede all of the related premiums to a reinsurer, therefore transferring substantially all of that risk. Reinsurance protection for Cincinnati Global's business is also provided through separate treaties.The Cincinnati Specialty Underwriters Insurance Company has separate property and casualty reinsurance treaties for 2022 through its parent, TheCincinnati Insurance Company . Primary components of the treaties include: •Property per risk treaty - The property treaty provides limits up to $5 million, which is adequate capacity for the risk profile we insure. It also includes protection for extra-contractual liability coverage losses.Cincinnati Specialty Underwriters retains the first $1 million of any policy loss. Losses between $1 million and $5 million are reinsured at 100% by TheCincinnati Insurance Company . •Casualty treaties - The casualty treaty is written on an excess of loss basis and provide limits up to $6 million, which is adequate capacity for the risk profile we insure. A second treaty layer of $5 million excess of $6 million is written to provide coverage for extra contractual obligations or clash exposures. The maximum retention for any one casualty loss is $2 million by Cincinnati Specialty Underwriters. Losses on a per occurrence basis between $2 million and $6 million and extra contractual and clash losses between $6 million and $11 million are reinsured at 100% by TheCincinnati Insurance Company .
•Basket retention - Cincinnati Specialty Underwriters has purchased this
coverage to limit their retention to $2 million in the event that the same
occurrence results in both a property and a casualty loss.
•Property catastrophe treaty - As a subsidiary of The
Company
corporate property catastrophe treaty. All terms and conditions of this
reinsurance coverage apply to policies underwritten by Cincinnati Specialty
Underwriters.
Cincinnati Financial Corporation - 2021 10-K - Page 107 --------------------------------------------------------------------------------
For property risks with limits exceeding $5 million or casualty risks with
limits exceeding $6 million, underwriters place facultative reinsurance coverage
on an individual certificate basis.
Cincinnati Life, our life insurance subsidiary, purchases reinsurance under
separate treaties with many of the same reinsurers that write the property
casualty working treaties. Our corporate retention is $1 million on a single
life. For most of our core term life insurance line of business, we retain no
more than a $500,000 exposure on a single policy, ceding the balance using
excess over retention mortality coverage, and retaining the policy reserve.
Because of the conservative nature of statutory reserving principles, retaining
the policy reserve unduly depresses our statutory earnings and requires a large
commitment of our capital. Effective November 1, 2015, we increased our
retention to $1 million for issue ages up to 61 years on new term life insurance
sales. For issue ages 61 years or older, our retention remains $500,000. For
term life insurance business written prior to 2005, we retain 10% to 25% of each
term policy, not to exceed $500,000, ceding the balance of mortality risk and
policy reserve.
We also have catastrophe reinsurance coverage on our life insurance operations
that reimburses us for covered net losses in excess of $13 million. Our recovery
is capped at $75 million for losses involving our associates.
The following table shows our five largest life reinsurance receivable amounts
by reinsurer at year-end 2021 and 2020. Insurer financial strength ratings are
also shown.
(Dollars in millions) 2021 2020
Total Total
Name of reinsurer receivable Rating agency Rating receivable Rating Agency Rating
Swiss Re Life & Health America,
Inc. $ 66 A.M. Best A+ $ 71 A.M. Best A+
General Re Life Corporation 44 A.M. Best A++ 43 A.M. Best A++
Lincoln National Life Insurance
Company 30 A.M. Best A+ 31 A.M. Best A+
Security Life of Denver
Insurance Company 19 S&P A+ 22 S&P A+
Employers Reassurance
Corporation 15 S&P BBB+ 15 S&P BBB+
Cincinnati Financial Corporation - 2021 10-K - Page 108 --------------------------------------------------------------------------------
Safe Harbor Statement
This is our "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in Item 1A, Risk Factors.
Factors that could cause or contribute to such differences include, but are not
limited to:
•Effects of the COVID-19 pandemic that could affect results for reasons such as:
•Securities market disruption or volatility and related effects such as
decreased economic activity and continued supply chain disruptions that affect
our investment portfolio and book value
•An unusually high level of claims in our insurance or reinsurance operations
that increase litigation-related expenses
•An unusually high level of insurance losses, including risk of legislation or court decisions extending business interruption insurance in commercial property coverage forms to cover claims for pure economic loss related to the COVID-19 pandemic
•Decreased premium revenue and cash flow from disruption to our distribution
channel of independent agents, consumer self-isolation, travel limitations,
business restrictions and decreased economic activity
•Inability of our workforce, agencies or vendors to perform necessary business
functions
•Ongoing developments concerning business interruption insurance claims and litigation related to the COVID-19 pandemic that affect our estimates of losses and loss adjustment expenses or our ability to reasonably estimate such losses, such as:
•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
•Differences in state laws 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
•The inherent unpredictability of litigation
•Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns (whether as a result of global climate change or otherwise), environmental events, terrorism incidents, civil unrest or other causes •Increased frequency and/or severity of claims or development of claims that are unforeseen at the time of policy issuance, due to inflationary trends or other causes
•Inadequate estimates or assumptions, or reliance on third-party data used for
critical accounting estimates
•Declines in overall stock market values negatively affecting our equity
portfolio and book value
•Prolonged low interest rate environment or other factors that limit our ability to generate growth in investment income or interest rate fluctuations that result in declining values of fixed-maturity investments, including declines in accounts in which we hold bank-owned life insurance contract assets
•Domestic and global events resulting in capital market or credit market
uncertainty, followed by prolonged periods of economic instability or recession,
that lead to:
•Significant or prolonged decline in the fair value of a particular security or
group of securities and impairment of the asset(s)
•Significant decline in investment income due to reduced or eliminated dividend
payouts from a particular security or group of securities
•Significant rise in losses from surety or director and officer policies written
for financial institutions or other insured entities
Cincinnati Financial Corporation - 2021 10-K - Page 109 --------------------------------------------------------------------------------
•Our inability to manage Cincinnati Global or other subsidiaries to produce
related business opportunities and growth prospects for our ongoing operations
•Recession or other economic conditions resulting in lower demand for insurance
products or increased payment delinquencies
•Ineffective information technology systems or discontinuing to develop and
implement improvements in technology may impact our success and profitability
•Difficulties with technology or data security breaches, including cyberattacks, that could negatively affect our or our agents' ability to conduct business; disrupt our relationships with agents, policyholders and others; cause reputational damage, mitigation expenses and data loss and expose us to liability under federal and state laws •Difficulties with our operations and technology that may negatively impact our ability to conduct business, including cloud-based data information storage, data security, cyberattacks, remote working capabilities, and/or outsourcing relationships and third-party operations and data security
•Disruption of the insurance market caused by technology innovations such as
driverless cars that could decrease consumer demand for insurance products
•Delays, inadequate data developed internally or from third parties, or performance inadequacies from ongoing development and implementation of underwriting and pricing methods, including telematics and other usage-based insurance methods, or technology projects and enhancements expected to increase our pricing accuracy, underwriting profit and competitiveness •Intense competition, and the impact of innovation, technological change and changing customer preferences on the insurance industry and the markets in which we operate, could harm our ability to maintain or increase our ability to maintain or increase our business volumes and profitability
•Changing consumer insurance-buying habits and consolidation of independent
insurance agencies could alter our competitive advantages
•Inability to obtain adequate ceded reinsurance on acceptable terms, amount of
reinsurance coverage purchased, financial strength of reinsurers and the
potential for nonpayment or delay in payment by reinsurers
•Inability to defer policy acquisition costs for any business segment if pricing and loss trends would lead management to conclude that segment could not achieve sustainable profitability
•Inability of our subsidiaries to pay dividends consistent with current or past
levels
•Events or conditions that could weaken or harm our relationships with our independent agencies and hamper opportunities to add new agencies, resulting in limitations on our opportunities for growth, such as:
•Downgrades of our financial strength ratings
•Concerns that doing business with us is too difficult
•Perceptions that our level of service, particularly claims service, is no
longer a distinguishing characteristic in the marketplace
•Inability or unwillingness to nimbly develop and introduce coverage product updates and innovations that our competitors offer and consumers expect to find in the marketplace
•Actions of insurance departments, state attorneys general or other regulatory
agencies, including a change to a federal system of regulation from a
state-based system, that:
•Impose new obligations on us that increase our expenses or change the
assumptions underlying our critical accounting estimates
•Place the insurance industry under greater regulatory scrutiny or result in new
statutes, rules and regulations
•Restrict our ability to exit or reduce writings of unprofitable coverages or
lines of business
•Add assessments for guaranty funds, other insurancerelated assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes
•Increase our provision for federal income taxes due to changes in tax law
•Increase our other expenses
Cincinnati Financial Corporation - 2021 10-K - Page 110 --------------------------------------------------------------------------------
•Limit our ability to set fair, adequate and reasonable rates
•Place us at a disadvantage in the marketplace
•Restrict our ability to execute our business model, including the way we
compensate agents
•Adverse outcomes from litigation or administrative proceedings, including
effects of social inflation on the size of litigation awards
•Events or actions, including unauthorized intentional circumvention of
controls, that reduce our future ability to maintain effective internal control
over financial reporting under the Sarbanes-Oxley Act of 2002
•Unforeseen departure of certain executive officers or other key employees due to retirement, health or other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of certain longstanding relationships with insurance agents and others
•Our inability, or the inability of our independent agents, to attract and
retain personnel in a competitive labor market, impacting the customer
experience and altering our competitive advantages
•Events, such as an epidemic, natural catastrophe or terrorism, that could
hamper our ability to assemble our workforce at our headquarters location or
work effectively in a remote environment
Further, our insurance businesses are subject to the effects of changing social,
global, economic and regulatory environments. Public and regulatory initiatives
have included efforts to adversely influence and restrict premium rates,
restrict the ability to cancel policies, impose underwriting standards and
expand overall regulation. We also are subject to public and regulatory
initiatives that can affect the market value for our common stock, such as
measures affecting corporate financial reporting and governance. The ultimate
changes and eventual effects, if any, of these initiatives are uncertain.
Cincinnati Financial Corporation - 2021 10-K - Page 111
--------------------------------------------------------------------------------
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