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CINCINNATI FINANCIAL CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion highlights significant factors influencing the condensed consolidated results of operations and financial position ofCincinnati Financial Corporation . It should be read in conjunction with the consolidated financial statements and related notes included in our 2020 Annual Report on Form 10-K. Unless otherwise noted, the industry data is prepared byA.M. Best Co. , a leading insurance industry statistical, analytical and financial strength rating organization. Information fromA.M. Best is presented on a statutory basis for insurance company regulation inthe United States of America . When we provide our results on a comparable statutory 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). We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and dividends. Dollar amounts are rounded to millions; calculations of percent changes are based on dollar amounts rounded to the nearest million. Certain percentage changes are identified as not meaningful (nm). 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 our 2020 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 34. 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 that affect the company's 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, environmental events, terrorism incidents 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, assumptions or reliance on third-party data used for critical accounting estimates •Declines in overall stock market values negatively affecting the company's equity portfolio and book value Cincinnati Financial Corporation Third-Quarter 2021 10-Q Page 27 -------------------------------------------------------------------------------- •Prolonged low interest rate environment or other factors that limit the company's 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 and director and officer policies written for financial institutions or other insured entities •Our inability to integrate Cincinnati Global and its subsidiaries into our ongoing operations, or disruptions to our ongoing operations due to such integration •Recession or other economic conditions resulting in lower demand for insurance products or increased payment delinquencies •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 •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 •Increased competition that could result in a significant reduction in the company's premium volume •Changing consumer insurance-buying habits and consolidation of independent insurance agencies that 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 the company's relationships with its independent agencies and hamper opportunities to add new agencies, resulting in limitations on the company's opportunities for growth, such as: •Downgrades of the company's financial strength ratings •Concerns that doing business with the company is too difficult •Perceptions that the company's 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 Cincinnati Financial Corporation Third-Quarter 2021 10-Q Page 28 -------------------------------------------------------------------------------- •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 •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 •Events or actions, including unauthorized intentional circumvention of controls, that reduce the company's 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 •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, the company's 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. The company also is subject to public and regulatory initiatives that can affect the market value for its 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 Third-Quarter 2021 10-Q Page 29 -------------------------------------------------------------------------------- CORPORATE FINANCIAL HIGHLIGHTS Net Income and Comprehensive Income Data (Dollars in millions, except per share data) Three months ended September 30, Nine months ended September 30, 2021 2020 % Change 2021 2020 % Change Earned premiums$ 1,669 $ 1,522 10$ 4,806 $ 4,460 8 Investment income, net of expenses (pretax) 179 167 7 528 498 6 Investment gains and losses, net (pretax) (70) 533 nm 954 (132) nm Total revenues 1,785 2,227 (20) 6,307 4,842 30 Net income 153 484 (68) 1,476 167 nm Comprehensive income 85 573 (85) 1,370 405 238 Net income per share-diluted 0.94 2.99 (69) 9.07 1.03 nm Cash dividends declared per share 0.63 0.60 5 1.89 1.80 5 Diluted weighted average shares outstanding 162.9 162.0 1 162.8 162.5 0 Total revenues decreased 20% for the third quarter of 2021, compared with the third quarter of 2020, as a decrease in net investment gains offset increases in earned premiums and investment income. For the first nine months of 2021, compared with the first nine months of 2020, total revenues increased 30%, primarily due to higher earned premiums and net investment gains in 2021 instead of net investment losses in 2020. Premium and investment revenue trends are discussed further in the respective sections of Financial Results. Investment gains and losses are recognized on the sales of investments, on certain changes in fair values of securities even though we continue to hold the securities or as otherwise required by GAAP. We have substantial discretion in the timing of investment sales, and that timing generally is independent of the insurance underwriting process. The change in fair value of securities is also generally independent of the insurance underwriting process. Net income for the third quarter of 2021, compared with the same period in 2020, decreased$331 million , including a decrease of$477 million in after-tax net investment gains that offset increases of$136 million in after-tax property casualty underwriting income and$10 million in after-tax investment income. Catastrophe losses for the third quarter of 2021, mostly weather related, were$31 million lower after taxes and favorably affected both net income and property casualty underwriting income. Life insurance segment results on a pretax basis decreased by$11 million compared with third-quarter 2020. For the first nine months of 2021, net income increased$1.309 billion , compared with the same period of 2020, including increases of$857 million in after-tax investment gains and losses,$429 million in after-tax property casualty underwriting income and$25 million in after-tax investment income. The property casualty underwriting income increase included a favorable$145 million after-tax effect from lower catastrophe losses. Life insurance segment results decreased by$18 million on a pretax basis. During the first nine months of 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. We believe the COVID-19 pandemic did not have a significant effect on our premium revenues for the second or third quarters of 2021, while it had a modestly slowing effect on premium growth for the first quarter of the year. 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 the first nine months of 2021, changes to our estimates for incurred losses and expenses related to the pandemic included a$2 million increase in Cincinnati Re® losses and a$5 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 Financial Corporation Third-Quarter 2021 10-Q Page 30 --------------------------------------------------------------------------------
Cincinnati Re losses,
(Cincinnati Global) losses,
uncollectible premiums and
for personal auto policies.
Loss experience for our insurance operations is influenced by many factors, as discussed in our 2020 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Reserves, Page 56. 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. Performance by segment is discussed below in Financial Results. As discussed in our 2020 Annual Report on Form 10-K, Item 7, Factors Influencing Our Future Performance, Page 55, there are several reasons why our performance during 2021 may be below our long-term targets. The board of directors is committed to rewarding shareholders directly through cash dividends and through share repurchase authorizations. Through 2020, the company had increased the annual cash dividend rate for 60 consecutive years, a record we believe is matched by only seven otherU.S. publicly traded companies. InJanuary 2021 , the board of directors increased the regular quarterly dividend to63 cents per share, setting the stage for our 61st consecutive year of increasing cash dividends. During the first nine months of 2021, cash dividends declared by the company increased 5% compared with the same period of 2020. Our board regularly evaluates relevant factors in decisions related to dividends and share repurchases. The 2021 dividend increase reflected our strong earnings performance and signaled management's and the board's positive outlook and confidence in our outstanding capital, liquidity and financial flexibility. Cincinnati Financial Corporation Third-Quarter 2021 10-Q Page 31 -------------------------------------------------------------------------------- Balance Sheet Data and Performance Measures (Dollars in millions, except share data) At September 30, At December 31, 2021 2020 Total investments$ 23,213 $ 21,542 Total assets 29,907 27,542 Short-term debt 59 54 Long-term debt 789 788 Shareholders' equity 11,841 10,789 Book value per share 73.49 67.04 Debt-to-total-capital ratio 6.7 %
7.2 %
Total assets atSeptember 30, 2021 , increased 9% compared with year-end 2020, and included an 8% increase in total investments that reflected a combination of net purchases and higher fair values for many securities in our portfolio. Shareholders' equity increased 10% and book value per share also increased 10% during the first nine months of 2021. Our debt-to-total-capital ratio (capital is the sum of debt plus shareholders' equity) decreased compared with year-end 2020. Our value creation ratio is our primary performance metric. That ratio was 12.4% for the first nine months of 2021, and was significantly higher than the same period in 2020, reflecting both higher net income before investment gains and a higher amount of overall net gains from our investment portfolio. The$6.45 increase in book value per share during the first nine months of 2021 contributed 9.6 percentage points to the value creation ratio, while dividends declared at$1.89 per share contributed 2.8 points. Value creation ratios by major components and in total, along with calculations from per-share amounts, are shown in the tables below. Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Value creation ratio major components: Net income before investment gains 1.8 % 0.7 % 6.7 % 2.8 % Change in fixed-maturity securities, realized and unrealized gains (0.5) 1.0 (1.0) 1.8 Change in equity securities, investment gains (0.7) 4.5 6.4 (0.5) Other 0.1 0.1 0.3 (1.1) Value creation ratio 0.7 % 6.3 % 12.4 % 3.0 %
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(Dollars are per share) Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Value creation ratio:
End of period book value* $ 73.49 $ 60.57 $ 73.49 $ 60.57
Less beginning of period book value 73.57 57.56 67.04 60.55
Change in book value (0.08) 3.01 6.45 0.02
Dividend declared to shareholders 0.63 0.60 1.89 1.80
Total value creation $ 0.55 $ 3.61 $ 8.34 $ 1.82
Value creation ratio from change in book
value** (0.1) % 5.2 % 9.6 % 0.0 % Value creation ratio from dividends declared to shareholders*** 0.8 1.1 2.8 3.0 Value creation ratio 0.7 % 6.3 % 12.4 % 3.0 %
* 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 period book value
*** Dividend declared to shareholders divided by beginning of period book value
DRIVERS OF LONG-TERM VALUE CREATION Operating through TheCincinnati Insurance Company ,Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on 2020 net written premiums for approximately 2,000U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies as discussed in our 2020 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. AtSeptember 30, 2021 , we actively marketed through agencies located in 45 states. We maintain a long-term perspective that guides us in addressing immediate challenges or opportunities while focusing on the major decisions that best position our company for success through all market cycles. To measure our long-term progress in creating shareholder value, our value creation ratio is our primary financial performance target. As discussed in our 2020 Annual Report on Form 10-K, Item 7, Executive Summary, Page 50, management believes this measure is a meaningful indicator of our long-term progress in creating shareholder value and has three primary performance drivers: •Premium growth - We believe our agency relationships and initiatives can lead to a property casualty written premium growth rate over any five-year period that exceeds the industry average. For the first nine months of 2021, our consolidated property casualty net written premium year-over-year growth was 11%, comparing favorably with the industry's 7% growth rate reported byA.M. Best for the first six months of 2021. For the five-year period 2016 through 2020, our growth rate exceeded that of the industry. The industry's growth rate excludes its mortgage and financial guaranty lines of business. •Combined ratio - We believe our underwriting philosophy and initiatives can generate a GAAP combined ratio over any five-year period that is consistently within the range of 95% to 100%. For the first nine months of 2021, our GAAP combined ratio was 89.8%, including 10.7 percentage points of current accident year catastrophe losses partially offset by 7.2 percentage points of favorable loss reserve development on prior accident years. Our statutory combined ratio was 89.0% for the first nine months of 2021, comparing favorably with the industry's 96.9% reported byA.M. Best for the first six 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 return of theStandard & Poor's 500 Index. For the first nine months of 2021, pretax investment income was$528 million , up 6% compared with the same period in 2020. We believe our investment portfolio mix provides an appropriate balance of income stability and growth with capital appreciation potential. Cincinnati Financial Corporation Third-Quarter 2021 10-Q Page 33 -------------------------------------------------------------------------------- Highlights of Our Strategy and Supporting Initiatives Management has worked to identify a strategy that can lead to long-term success, with concurrence by the board of directors. Our strategy is intended to position us to compete successfully in the markets we have targeted while appropriately managing risk. Further description of our long-term, proven strategy can be found in our 2020 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. We believe successful implementation of initiatives that support our strategy will help us better serve our agent customers and reduce volatility in our financial results while we also grow earnings and book value over the long term, successfully navigating challenging economic, market or industry pricing cycles. •Manage insurance profitability - Implementation of these initiatives is intended to enhance underwriting expertise and knowledge, thereby increasing our ability to manage our business while also gaining efficiency. Better profit margins can arise from additional information and more focused action on underperforming product lines, plus pricing capabilities we are expanding through the use of technology and analytics. In addition to enhancing company efficiency, improving internal processes also supports the ability of the independent agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses. We continue to enhance our property casualty underwriting expertise and to effectively and efficiently underwrite individual policies and process transactions. Ongoing initiatives supporting this work include expanding our pricing and segmentation capabilities through experience and use of predictive analytics and additional data. Our segmentation efforts emphasize identification and retention of insurance policies we believe have relatively stronger pricing, while seeking more aggressive renewal terms and conditions on policies we believe have relatively weaker pricing. •Drive premium growth - Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Premium growth initiatives also include expansion of Cincinnati Re, our reinsurance assumed operation, and successful integration of Cincinnati Global, ourLondon -based global specialty underwriter for Lloyd's Syndicate 318. Diversified growth also may reduce variability of losses from weather-related catastrophes. We continue to appoint new agencies to develop additional points of distribution. During the first nine months of 2021, we appointed 122 new agencies that offer most or all of our property casualty insurance products. As ofSeptember 30, 2021 , a total of 1,904 agency relationships market our property casualty insurance products from 2,687 reporting locations. The totals do not include Lloyd's brokers or coverholders that source business for Cincinnati Global. Financial Strength An important part of our long-term strategy is financial strength, which is described in our 2020 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Financial Strength, Page 9. One aspect of our financial strength is prudent use of reinsurance ceded to help manage financial performance variability due to catastrophe loss experience. A description of how we use reinsurance ceded is included in our 2020 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, 2021 Reinsurance Ceded Programs, Page 110. Another aspect of our financial strength is our investment portfolio, which remains well-diversified as discussed in this quarterly report in Item 3, Quantitative and Qualitative Disclosures About Market Risk. Our strong parent-company liquidity and financial strength increase our flexibility to maintain a cash dividend through all periods and to continue to invest in and expand our insurance operations. AtSeptember 30, 2021 , we held$4.461 billion of our cash and cash equivalents and invested assets at the parent-company level, of which$4.072 billion , or 91.3%, was invested in common stocks, and$156 million , or 3.5%, was cash or cash equivalents. Our debt-to-total-capital ratio was 6.7% atSeptember 30, 2021 . Another important indicator of financial strength is our ratio of property casualty net written premiums to statutory surplus, which was 0.9-to-1 for the 12 months endedSeptember 30, 2021 , compared with 1.0-to-1 at year-end 2020. Cincinnati Financial Corporation Third-Quarter 2021 10-Q Page 34 -------------------------------------------------------------------------------- Financial strength ratings assigned to us by independent rating firms also are important. In addition to rating our parent company's senior debt, four firms award insurer financial strength ratings to one or more of our insurance subsidiary companies based on their quantitative and qualitative analyses. These ratings primarily assess an insurer's ability to meet financial obligations to policyholders and do not necessarily address all of the matters that may be important to investors. Ratings are under continuous review and subject to change or withdrawal at any time by the rating agency. Each rating should be evaluated independently of any other rating; please see each rating agency's website for its most recent report on our ratings. AtOctober 26, 2021 , our insurance subsidiaries continued to be highly rated. Insurer Financial Strength Ratings Rating Life insurance agency Standard market property casualty insurance subsidiaries subsidiary Excess and surplus lines insurance subsidiary Outlook Rating Rating Rating tier tier tierA.M. Best Co. A+ Superior 2 of 16 A+ Superior 2 of 16 A+ Superior 2 of 16 Stable ambest.com Fitch Ratings A+ Strong 5 of 21 A+ Strong 5 of 21 - - - Stable fitchratings.com Moody's Investors Service A1 Good 5 of 21 - - - - - - Stable moodys.comS&P Global Ratings A+ Strong 5 of 21 A+ Strong 5 of 21 - - - Stable spratings.com
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CONSOLIDATED PROPERTY CASUALTY INSURANCE HIGHLIGHTS
Consolidated property casualty insurance results include premiums and expenses
for our standard market insurance segments (commercial lines and personal
lines), our excess and surplus lines segment, Cincinnati Re and our London -based
global specialty underwriter Cincinnati Global.
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Earned premiums $ 1,596 $ 1,450 10 $ 4,585 $ 4,242 8
Fee revenues 3 2 50 8 7 14
Total revenues 1,599 1,452 10 4,593 4,249 8
Loss and loss expenses from:
Current accident year before
catastrophe losses 872 807 8 2,583 2,456 5
Current accident year catastrophe
losses 218 275 (21) 489 643 (24)
Prior accident years before
catastrophe losses (112) (3) nm (282) (72) (292)
Prior accident years catastrophe
losses 10 (8) nm (49) (19) (158)
Loss and loss expenses 988 1,071 (8) 2,741 3,008 (9)
Underwriting expenses 490 432 13 1,377 1,309 5
Underwriting profit (loss) $ 121 $ (51) nm $ 475 $ (68)
nm
Ratios as a percent of earned premiums: Pt. Change Pt.
Change
Current accident year before catastrophe losses 54.7 % 55.7 % (1.0) 56.3 % 57.9 %
(1.6)
Current accident year catastrophe losses 13.6 18.9 (5.3) 10.7 15.1 (4.4) Prior accident years before catastrophe losses (7.0) (0.2) (6.8) (6.1) (1.7) (4.4) Prior accident years catastrophe losses 0.6 (0.6) 1.2 (1.1) (0.4) (0.7) Loss and loss expenses 61.9 73.8 (11.9) 59.8 70.9 (11.1) Underwriting expenses 30.7 29.8 0.9 30.0 30.9 (0.9) Combined ratio 92.6 % 103.6 % (11.0) 89.8 % 101.8 % (12.0) Combined ratio 92.6 % 103.6 % (11.0) 89.8 % 101.8 % (12.0) Contribution from catastrophe losses and prior years reserve development 7.2 18.1 (10.9) 3.5 13.0 (9.5) Combined ratio before catastrophe losses and prior years reserve development 85.4 % 85.5 % (0.1) 86.3 % 88.8 % (2.5) We believe the COVID-19 pandemic did not have a significant effect on our consolidated property casualty premium revenues for the third or second quarters of 2021, while it had a modestly slowing effect on premium growth for the first quarter of 2021. The pandemic and a weakened economy reduced premium volume during the first quarter of 2021 and the second and third quarters of last year. A strengthening economy in 2021 contributed to premium growth for the third quarter and first nine months of 2021, compared with the same periods a year ago.
Consolidated property casualty net written premiums grew 10% for the third
quarter of 2021. For the first nine months of 2021, compared with the same
period of 2020, consolidated property casualty net written premiums grew 11%,
including a contribution of 3% from Cincinnati Re.
Consolidated property casualty new business written premiums increased 22% and
12% for the third quarter and first nine months of 2021, compared with the same
periods of 2020. For policies that renewed during the first nine months of 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
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or legal expenses that occur independent of changes in mileage, sales or
payrolls of businesses we insure, due to pandemic effects or other factors.
Our consolidated property casualty insurance operations generated an underwriting profit of$121 million for the third quarter of 2021 and$475 million for the first nine months of 2021. The increases of$172 million and$543 million , respectively, compared with the same periods of 2020, included favorable decreases of$39 million and$184 million in losses from catastrophes, mostly caused by severe weather. We believe future property casualty underwriting results will continue to benefit from price increases and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices. For all property casualty lines of business in aggregate, net loss and loss expense reserves atSeptember 30, 2021 , were$504 million , or 8%, higher than at year-end 2020, including an increase of$299 million for the IBNR portion. We measure and analyze property casualty underwriting results primarily by the combined ratio and its component ratios. The GAAP-basis combined ratio is the percentage of incurred losses plus all expenses per each earned premium dollar - the lower the ratio, the better the performance. An underwriting profit results when the combined ratio is below 100%. A combined ratio above 100% indicates that an insurance company's losses and expenses exceeded premiums. Our consolidated property casualty combined ratio for the third quarter of 2021 improved by 11.0 percentage points, compared with the same period of 2020, including a decrease of 4.1 points from lower catastrophe losses and loss expenses. For the first nine months of 2021, compared with the 2020 nine-month period, our combined ratio improved by 12.0 percentage points, including a decrease of 5.1 points from lower catastrophe losses and loss expenses. The combined ratio can be affected significantly by natural catastrophe losses and other large losses as discussed in detail below. The combined ratio can also be affected by updated estimates of loss and loss expense reserves established for claims that occurred in prior periods, referred to as prior accident years. Net favorable development on prior accident year reserves, including reserves for catastrophe losses, benefited the combined ratio by 7.2 percentage points in the first nine months of 2021, compared with 2.1 percentage points in the same period of 2020. Net favorable development is discussed in further detail in Financial Results by property casualty insurance segment. The ratio for current accident year loss and loss expenses before catastrophe losses improved in the first nine months of 2021. That 56.3% ratio was 1.6 percentage points lower, compared with the 57.9% accident year 2020 ratio measured as ofSeptember 30, 2020 , including an increase of 0.2 points in the ratio for large losses of$1 million or more per claim, discussed below. The underwriting expense ratio increased for the third quarter of 2021, compared with the same period a year ago, primarily due to an increase in profit-sharing commissions for agencies. The underwriting expense ratio decreased for the first nine months of 2021, compared with the same period a year ago. The nine-month decrease reflected the second-quarter 2020$16 million Stay-at-Home policyholder credit for personal auto policies, in addition to ongoing expense management efforts and higher earned premiums. Cincinnati Financial Corporation Third-Quarter 2021 10-Q Page 37 -------------------------------------------------------------------------------- Consolidated Property Casualty Insurance Premiums (Dollars in millions) Three months ended September 30, Nine months ended September 30, 2021 2020 % Change 2021 2020 % Change Agency renewal written premiums$ 1,244 $ 1,153 8$ 3,853 $ 3,595 7 Agency new business written premiums 230 189 22 685 614 12 Other written premiums 64 51 25 407 261 56 Net written premiums 1,538 1,393 10 4,945 4,470 11 Unearned premium change 58 57 2 (360) (228) (58) Earned premiums$ 1,596 $ 1,450 10$ 4,585 $ 4,242 8 The trends in net written premiums and earned premiums summarized in the table above include the effects of price increases. Price change trends that heavily influence renewal written premium increases or decreases, along with other premium growth drivers for 2021, are discussed in more detail by segment below in Financial Results. Consolidated property casualty net written premiums for the three and nine months endedSeptember 30, 2021 , grew$145 million and$475 million compared with the same periods of 2020. Our premium growth initiatives from prior years have provided an ongoing favorable effect on growth during the current year, particularly as newer agency relationships mature over time. Consolidated property casualty agency new business written premiums increased by$41 million and$71 million for the third quarter and first nine months of 2021, compared with the same periods of 2020. New agency appointments during 2020 and 2021 produced a$38 million increase in standard lines new business for the first nine months of 2021 compared with the same period of 2020. As we appoint new agencies that choose to move accounts to us, we report these accounts as new business. While this business is new to us, in many cases it is not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that may be less familiar to our agent upon obtaining it from a competing agent. Net written premiums for Cincinnati Re, included in other written premiums, increased by$3 million and$147 million for the three and nine months endedSeptember 30, 2021 , compared with the same periods of 2020, to$57 million and$389 million , respectively. 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. Cincinnati Global is also included in other written premiums. Net written premiums increased, by$9 million and$6 million , for the three and nine months endedSeptember 30, 2021 , compared with the same periods of 2020, to$47 million and$135 million , respectively. Other written premiums also include premiums ceded to reinsurers as part of our reinsurance ceded program. An increase in ceded premiums decreased net written premiums by$1 million and$9 million for the third quarter and first nine months of 2021, compared with the same periods of 2020.
Catastrophe losses and loss expenses typically have a material effect on
property casualty results and can vary significantly from period to period.
Losses from catastrophes contributed 14.2 and 9.6 percentage points to the
combined ratio in the third quarter and first nine months of 2021, compared with
18.3 and 14.7 percentage points in the same periods of 2020.
The reinsurance program for Cincinnati Re that was effectiveJune 1, 2021 , provided a recovery based on Hurricane Ida losses estimated as ofSeptember 30, 2021 . The estimated recovery from the program was$18 million , with a net incurred loss of$80 million for Cincinnati Re in the third quarter of 2021, excluding the benefit of reinstatement premiums estimated at approximately$11 million . Before any recoveries, the program included property catastrophe excess of loss coverage with an annual total available aggregate limit of$48 million in excess of$80 million per loss. Cincinnati Financial Corporation Third-Quarter 2021 10-Q Page 38 -------------------------------------------------------------------------------- The following table shows consolidated property casualty insurance catastrophe losses and loss expenses incurred, net of reinsurance, as well as the effect of loss development on prior period catastrophe events. We individually list declared catastrophe events for which our incurred losses reached or exceeded$10 million . Consolidated Property Casualty Insurance Catastrophe Losses and Loss Expenses Incurred (Dollars in millions, net of reinsurance) Three months endedSeptember 30 , Nine months endedSeptember 30 , Comm. Pers. E&S Comm. Pers. E&S Dates Region lines lines lines Other Total lines lines lines Other Total 2021Feb. 12-15 South, West$ (1) $ - $ -$ (10) $ (11) $ 9 $ 5 $ -$ 37 $ 51 Feb. 16-20 Midwest, Northeast, South (3) (3) - (2) (8) 21 30 1 9 61Mar. 24-26 Midwest, Northeast, South (1) (1) - - (2) 12 18 - - 30Mar. 27-29 Midwest, Northeast, South 1 (1) - - - 4 8 - - 12May 3-4 South (2) - - - (2) 9 4 - - 13Jun. 17-20 Midwest 6 2 - - 8 12 16 - -28 Jun. 24 -Jul. 1 Midwest, Northeast, South, West 3 6 - - 9 5 12 - -17 Aug. 10 - 13 Midwest, Northeast, South 6 9 - - 15 6 9 - -15 Aug. 29 -Sep. 2 Northeast, South (Ida) 18 42 - 109 169 18 42 - 109 169 All other 2021 catastrophes 10 24 1 5 40 34 53 1 5 93 Development on 2020 and prior catastrophes (5) - - 15 10 (32) (4) - (13) (49) Calendar year incurred total $ 32$ 78 $ 1 $ 117 $ 228 $ 98 $ 193 $ 2 $ 147 $ 440 2020Jan. 10-12 Midwest, Northeast, South $ - $ - $ - $ - $ -$ 6 $ 5 $ - $ -$ 11 Feb. 5-8 Northeast, South - - - - - 10 5 - - 15Mar. 2-4 Midwest, South (3) - - - (3) 61 8 - 5 74Mar. 27-30 Midwest, Northeast, South - 1 - - 1 23 14 - - 37Apr. 7-9 Midwest, Northeast, South 2 4 - - 6 29 29 - - 58Apr. 10-14 Midwest, Northeast, South - - - - - 23 27 - - 50May 4-5 Midwest, South 1 - - - 1 23 5 - -28 May 26 -Jun. 8 Midwest, Northeast, South, West (1) - - - (1) 18 - 1 8 27Jul. 10-12 Midwest, South 14 14 - - 28 14 14 - -28 Jul. 30 -Aug. 5 International, South, Northeast 6 21 - - 27 6 21 - - 27Aug. 8-11 Midwest 84 19 - - 103 84 19 - - 103Aug. 26-28 South (Laura) 2 2 - 42 46 2 2 - 42 46Sep. 7-16 West 12 3 - - 15 12 3 - - 15Sep. 14-18 South (Sally) 6 8 - 14 28 6 8 - 14 28 All other 2020 catastrophes 5 14 1 4 24 26 61 3 6 96 Development on 2019 and prior catastrophes 1 (3) - (6) (8) (8) (8) - (3) (19) Calendar year incurred total $ 129$ 83 $ 1 $ 54 $ 267 $ 335 $ 213 $ 4 $ 72 $ 624 Cincinnati Financial Corporation Third-Quarter 2021 10-Q Page 39
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The following table includes data for losses incurred of
claim, net of reinsurance.
Consolidated Property Casualty Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance)
Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Current accident year losses greater
than $5 million $ 14 $ 21 (33) $ 57 $ 40 43
Current accident year losses $1
million - $5 million 72 46 57 154 149 3
Large loss prior accident year
reserve development 30 (3) nm 67 30 123
Total large losses incurred 116 64 81 278 219 27
Losses incurred but not reported (13) 38 nm 52 251 (79)
Other losses excluding catastrophe
losses 514 550 (7) 1,542 1,455 6
Catastrophe losses 215 261 (18) 421 611 (31)
Total losses incurred $ 832 $ 913 (9) $ 2,293 $ 2,536 (10)
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year losses greater
than $5 million 0.9 % 1.5 % (0.6) 1.2 % 0.9 % 0.3
Current accident year losses $1
million - $5 million 4.5 3.2 1.3 3.4 3.5 (0.1)
Large loss prior accident year
reserve development 1.9 (0.3) 2.2 1.5 0.8 0.7
Total large loss ratio 7.3 4.4 2.9 6.1 5.2 0.9
Losses incurred but not reported (0.8) 2.6 (3.4) 1.1 5.9 (4.8)
Other losses excluding catastrophe
losses 32.2 38.0 (5.8) 33.6 34.3 (0.7)
Catastrophe losses 13.4 18.0 (4.6) 9.2 14.4 (5.2)
Total loss ratio 52.1 % 63.0 % (10.9) 50.0 % 59.8 % (9.8)
We believe the inherent variability 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 variability in addition to general
inflationary trends in loss costs. Our analysis continues to indicate no
unexpected concentration of large losses and case reserve increases by risk
category, geographic region, policy inception, agency or field marketing
territory. The third-quarter 2021 property casualty total large losses incurred
of $116 million , net of reinsurance, were higher than the $74 million quarterly
average during full-year 2020 and the $64 million experienced for the
third quarter of 2020. The ratio for these large losses was 2.9 percentage
points higher compared with last year's third quarter. The third-quarter 2021
amount of total large losses incurred unfavorably contributed to the increase in
the nine-month 2021 total large loss ratio, compared with 2020, as it offset a
first-half 2021 ratio that was 0.2 points lower than the first half of 2020.
We believe results for the three- and nine-month periods largely reflected
normal fluctuations in loss patterns and normal variability in large case
reserves for claims above $1 million . Losses by size are discussed in further
detail in results of operations by property casualty insurance segment.
FINANCIAL RESULTS
Consolidated results reflect the operating results of each of our five segments
along with the parent company, Cincinnati Re, Cincinnati Global and other
activities reported as "Other." The five segments are:
•Commercial lines insurance
•Personal lines insurance
•Excess and surplus lines insurance
•Life insurance
•Investments
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COMMERCIAL LINES INSURANCE RESULTS
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Earned premiums $ 930 $ 865 8 $ 2,727 $ 2,598 5
Fee revenues 1 1 0 3 3 0
Total revenues 931 866 8 2,730 2,601 5
Loss and loss expenses from:
Current accident year before
catastrophe losses 521 500 4 1,580 1,540 3
Current accident year catastrophe
losses 37 128 (71) 130 343 (62)
Prior accident years before
catastrophe losses (102) (9) nm (244) (51) (378)
Prior accident years catastrophe
losses (5) 1 nm (32) (8) (300)
Loss and loss expenses 451 620 (27) 1,434 1,824 (21)
Underwriting expenses 298 266 12 839 809 4
Underwriting profit (loss) $ 182 $ (20) nm $ 457 $ (32) nm
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year before
catastrophe losses 56.1 % 57.8 % (1.7) 57.9 % 59.2 % (1.3)
Current accident year catastrophe
losses 3.9 14.7 (10.8) 4.8 13.2 (8.4)
Prior accident years before
catastrophe losses (10.9) (1.0) (9.9) (8.9) (1.9) (7.0)
Prior accident years catastrophe
losses (0.6) 0.1 (0.7) (1.2) (0.3) (0.9)
Loss and loss expenses 48.5 71.6 (23.1) 52.6 70.2 (17.6)
Underwriting expenses 32.1 30.8 1.3 30.8 31.1 (0.3)
Combined ratio 80.6 % 102.4 % (21.8) 83.4 % 101.3 % (17.9)
Combined ratio 80.6 % 102.4 % (21.8) 83.4 % 101.3 % (17.9)
Contribution from catastrophe
losses and
prior years reserve development (7.6) 13.8 (21.4) (5.3) 11.0 (16.3)
Combined ratio before catastrophe
losses and
prior years reserve development 88.2 % 88.6 % (0.4) 88.7 % 90.3 % (1.6)
Overview
Commercial lines insurance segment earned premiums grew 8% for the third quarter
and 5% for the first nine months of 2021, exceeding the 3% full-year 2019 earned
premiums growth rate recorded prior to the COVID-19 pandemic. The pandemic and a
weakened economy reduced premium volume during the first quarter of 2021 and the
second and third quarters of last year. A strengthening economy in 2021
contributed to net written premium growth for the third quarter and first nine
months of 2021, compared with the same periods a year ago.
Net written premiums grew 10% for the third quarter of 2021 and 7% for the first
nine months of 2021, compared with the same periods of 2020. New business
written premiums increased 27% for the third quarter of 2021 and 8% for the
first nine months of 2021. 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 for the first nine months of 2021. Loss experience before
catastrophe effects for our commercial lines insurance segment continued to
improve during the first nine months of 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 segment include:
•Premiums - Earned premiums and net written premiums for the commercial lines
segment rose during the third quarter and first nine months of 2021, compared
with the same periods a year ago, primarily due to renewal written premium
growth that continued to include higher average pricing. The table below
analyzes the primary components of premiums. We continue to use predictive
analytics tools to improve pricing precision and segmentation while leveraging
our local relationships with agents through the efforts of our teams that work
closely with them. We seek to maintain appropriate pricing discipline for both
new and renewal business as our agents and underwriters assess account quality
to make careful decisions on a policy-by-policy basis whether to write or renew
a policy.
Agency renewal written premiums increased by 7% for both the third quarter and
the first nine months of 2021, compared with the same periods of 2020. During
the third quarter of 2021, our overall standard commercial lines policies
averaged estimated renewal price increases at percentages near the low end of
the mid-single-digit range. We continue to segment commercial lines policies,
emphasizing identification and retention of those we believe have relatively
stronger pricing. Conversely, we have been seeking stricter renewal terms and
conditions on policies we believe have relatively weaker pricing, thus retaining
fewer of those policies. We measure average changes in commercial lines renewal
pricing as the percentage 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 the respective policies.
Our average overall commercial lines renewal pricing change includes the impact
of flat pricing for 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, our reported change in average commercial lines
renewal pricing reflects a blend of three-year policies that did not expire and
other policies that did expire during the measurement period. For commercial
lines policies that did expire and were then renewed during the third quarter of
2021, we estimate that our average percentage price increases were as follows:
commercial property near the high end of the mid-single-digit range, commercial
auto in the mid-single-digit range and commercial casualty in the
mid-single-digit range. The estimated average percentage price change for
workers' compensation was a decrease near the high end of the low-single-digit
range.
Renewal premiums for certain policies, primarily our commercial casualty and
workers' compensation lines of business, include the results of policy audits
that adjust initial premium amounts based on differences between estimated and
actual sales or payroll related to a specific policy. Audits completed during
the first nine months of 2021 contributed $31 million to net written premiums,
compared with $43 million for the same period of 2020.
New business written premiums for commercial lines increased by $31 million for
the third quarter and $34 million for the first nine months of 2021, compared
with the same periods of 2020. Trend analysis for year-over-year comparisons of
individual quarters is more difficult to assess for commercial lines new
business written premiums, due to inherent variability. That variability is
often driven by larger policies with annual premiums greater than $100,000 .
Other written premiums include premiums ceded to reinsurers as part of our
reinsurance ceded program. For our commercial lines insurance segment,
an increase in ceded premiums decreased net written premiums by $1 million and
$6 million for the third quarter and first nine months of 2021, compared with
the same periods of 2020.
Commercial Lines Insurance Premiums
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Agency renewal written premiums $ 775 $ 727 7 $ 2,525 $ 2,363 7
Agency new business written
premiums 145 114 27 436 402 8
Other written premiums (25) (27) 7 (70) (71) 1
Net written premiums 895 814 10 2,891 2,694 7
Unearned premium change 35 51 (31) (164) (96) (71)
Earned premiums $ 930 $ 865 8 $ 2,727 $ 2,598 5
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•Combined ratio - The commercial lines combined ratio for the third quarter of
2021 improved by 21.8 percentage points, compared with third-quarter 2020,
including a decrease of 11.5 points in losses from catastrophes. For the first
nine months of 2021, the combined ratio improved by 17.9 percentage points,
compared with the same period a year ago, including a decrease of 9.3 points in
losses from catastrophes. Underwriting results continued to reflect better loss
experience for the current accident year and a higher level of favorable reserve
development on prior accident years.
The ratio for current accident year loss and loss expenses before catastrophe
losses for commercial lines improved in the first nine months of 2021. That
57.9% ratio was 1.3 percentage points lower, compared with the 59.2% accident
year 2020 ratio measured as of September 30, 2020 , including an increase of
0.5 percentage points in the ratio for large losses of $1 million or more per
claim, discussed below.
Catastrophe losses and loss expenses accounted for 3.3 and 3.6 percentage points
of the combined ratio for the third quarter and first nine months of 2021,
compared with 14.8 and 12.9 percentage points for the same periods a year ago.
Through 2020, the 10-year annual average for that catastrophe measure for the
commercial lines segment was 6.2 percentage points, and the five-year annual
average was 6.6 percentage points.
The net effect of reserve development on prior accident years during the third
quarter and first nine months of 2021 was favorable for commercial lines overall
by $107 million and $276 million , compared with $8 million and $59 million for
the same periods in 2020. For the first nine months of 2021, our commercial
casualty, commercial property and workers' compensation lines of business were
the main contributors to the commercial lines net favorable reserve development
on prior accident years. The net favorable reserve development recognized during
the first nine months of 2021 for our commercial lines insurance segment was
primarily for accident years 2018 through 2020 and was primarily due to
lower-than-anticipated loss emergence on known claims. Reserve estimates are
inherently uncertain as described in our 2020 Annual Report on Form 10-K,
Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss
Expense Reserves, Page 56.
The commercial lines underwriting expense ratio increased for the third quarter
of 2021, compared with the same period a year ago, primarily due to an increase
in profit-sharing commissions for agencies. The underwriting expense ratio
decreased for the first nine months of 2021, compared with the same period a
year ago. The nine-month decrease was primarily due to lower levels of
uncollectible premiums, in addition to ongoing expense management efforts and
higher earned premiums.
Commercial Lines Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance)
Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Current accident year losses greater
than $5 million $ 4 $ 21 (81) $ 47 $ 40 18
Current accident year losses $1
million - $5 million 60 20 200 115 100 15
Large loss prior accident year
reserve development 29 (1) nm 69 27 156
Total large losses incurred 93 40 133 231 167 38
Losses incurred but not reported (35) 60 nm (30) 190 nm
Other losses excluding catastrophe
losses 270 287 (6) 857 817 5
Catastrophe losses 30 125 (76) 92 327 (72)
Total losses incurred $ 358 $ 512 (30) $ 1,150 $ 1,501 (23)
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year losses greater
than $5 million 0.5 % 2.5 % (2.0) 1.7 % 1.5 % 0.2
Current accident year losses $1
million - $5 million 6.5 2.3 4.2 4.2 3.9 0.3
Large loss prior accident year
reserve development 3.1 (0.2) 3.3 2.6 1.0 1.6
Total large loss ratio 10.1 4.6 5.5 8.5 6.4 2.1
Losses incurred but not reported (3.7) 6.9 (10.6) (1.1) 7.3 (8.4)
Other losses excluding catastrophe
losses 29.0 33.1 (4.1) 31.4 31.5 (0.1)
Catastrophe losses 3.1 14.5 (11.4) 3.4 12.6 (9.2)
Total loss ratio 38.5 % 59.1 % (20.6) 42.2 % 57.8 % (15.6)
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We continue to monitor new losses and case reserve increases greater than $1
million for trends in factors such as initial reserve levels, loss cost
inflation and claim settlement expenses. Our analysis continues to indicate
no unexpected concentration of these large losses and case reserve increases by
risk category, geographic region, policy inception, agency or field marketing
territory. The third-quarter 2021 commercial lines total large losses incurred
of $93 million , net of reinsurance, were higher than the quarterly average of
$55 million during full-year 2020 and the $40 million of total large losses
incurred for the third quarter of 2020. The increase in commercial lines large
losses for the first nine months of 2021 was primarily due to our commercial
casualty line of business. The third-quarter 2021 ratio for commercial lines
total large losses was 5.5 percentage points higher than last year's
third-quarter ratio. The third-quarter 2021 amount of total large losses
incurred unfavorably contributed to the increase in the nine-month 2021 total
large loss ratio, compared with 2020, in addition to a first-half 2021 ratio
that was 0.4 points higher than the first half of 2020. We believe results for
the three-and nine- month periods largely reflected normal fluctuations in loss
patterns and normal variability in large case reserves for claims
above $1 million .
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PERSONAL LINES INSURANCE RESULTS
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Earned premiums $ 388 $ 367 6 $ 1,146 $ 1,090 5
Fee revenues 1 1 0 3 3 0
Total revenues 389 368 6 1,149 1,093 5
Loss and loss expenses from:
Current accident year before
catastrophe losses 206 179 15 633 589 7
Current accident year catastrophe
losses 78 86 (9) 197 221 (11)
Prior accident years before
catastrophe losses (3) 3 nm (31) (20) (55)
Prior accident years catastrophe
losses - (3) 100 (4) (8) 50
Loss and loss expenses 281 265 6 795 782 2
Underwriting expenses 118 105 12 338 335 1
Underwriting profit (loss) $ (10) $ (2) (400) $ 16 $ (24) nm
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year before
catastrophe losses 53.1 % 48.5 % 4.6 55.2 % 54.0 % 1.2
Current accident year catastrophe
losses 20.1 23.3 (3.2) 17.2 20.2 (3.0)
Prior accident years before
catastrophe losses (0.7) 0.9 (1.6) (2.7) (1.8) (0.9)
Prior accident years catastrophe
losses (0.1) (0.8) 0.7 (0.4) (0.7) 0.3
Loss and loss expenses 72.4 71.9 0.5 69.3 71.7 (2.4)
Underwriting expenses 30.3 28.8 1.5 29.5 30.8 (1.3)
Combined ratio 102.7 % 100.7 % 2.0 98.8 % 102.5 % (3.7)
Combined ratio 102.7 % 100.7 % 2.0 98.8 % 102.5 % (3.7)
Contribution from catastrophe
losses and
prior years reserve development 19.3 23.4 (4.1) 14.1 17.7 (3.6)
Combined ratio before catastrophe
losses and
prior years reserve development 83.4 % 77.3 % 6.1 84.7 % 84.8 % (0.1)
Overview
The COVID-19 pandemic did not have a significant effect on our personal lines
insurance segment premiums for the third quarter or first nine months of 2021,
as net written premiums grew 7% for the quarter and 5% for the nine-month
period, compared with the same periods of 2020. Loss experience for our
insurance operations is influenced by many factors. For the third quarter and
first nine months of 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 the 2020 periods. Reduced driving in 2020 related to the pandemic
contributed to a reduction in reported claims, while driving patterns in 2021
have been moving 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 segment include:
•Premiums - Personal lines earned premiums and net written premiums continued to
grow during the third quarter and first nine months of 2021, reflecting
increased new business and renewal written premiums that included higher average
pricing. Personal lines net written premiums from high net worth policies
totaled approximately $180 million and $490 million for the third quarter and
first nine months of 2021, compared with $141 million and $387 million for the
same periods of 2020. The table below analyzes the primary components of
premiums.
Agency renewal written premiums increased 7% for the third quarter and 4% for
the first nine months of 2021, reflecting rate increases in selected states and
other factors such as changes in policy deductibles or mix of
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business. 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 the first nine months of 2021. For our homeowner line of business, we
estimate that premium rates for the first nine months of 2021 increased at
average percentages in the mid-single-digit range. For both our personal auto
and homeowner lines of business, some individual policies experienced lower or
higher rate changes based on each risk's specific characteristics and enhanced
pricing precision enabled by predictive models.
Personal lines new business written premiums increased 4% for the third quarter
and 18% for the first nine months of 2021, compared with the same periods of
2020. We believe underwriting and pricing discipline was maintained in recent
quarters, and growth was enhanced by expanded use of enhanced pricing precision
tools, including excess and surplus lines homeowner policies we began offering
in early 2020.
Other written premiums include premiums ceded to reinsurers as part of our
reinsurance ceded program. For our personal lines insurance segment, an increase
in ceded premiums decreased net written premiums by $1 million and $3 million
for the third quarter and first nine months of 2021, compared with the same
periods of 2020.
We continue to implement strategies discussed in our 2020 Annual Report on
Form 10-K, Item 1, Strategic Initiatives, Page 15, to enhance our responsiveness
to marketplace changes and to help achieve our long-term objectives for personal
lines growth and profitability.
Personal Lines Insurance Premiums
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Agency renewal written premiums $ 393 $ 366 7 $ 1,092 $ 1,047 4
Agency new business written
premiums 53 51 4 152 129 18
Other written premiums (11) (10) (10) (32) (27) (19)
Net written premiums 435 407 7 1,212 1,149 5
Unearned premium change (47) (40) (18) (66) (59) (12)
Earned premiums $ 388 $ 367 6 $ 1,146 $ 1,090 5
•Combined ratio - Our personal lines combined ratio for the third quarter of
2021 increased by 2.0 percentage points, compared with third-quarter 2020, as
higher current accident year loss and loss expenses before catastrophe losses
offset a decrease of 2.5 points in losses from catastrophes. For the first nine
months of 2021, the combined ratio improved by 3.7 percentage points, compared
with the same period a year ago, including a decrease of 2.7 points in losses
from catastrophes.
The ratio for current accident year loss and loss expenses before catastrophe
losses for personal lines increased in the first nine months of 2021. That 55.2%
ratio was 1.2 percentage points higher, compared with the 54.0% accident year
2020 ratio measured as of September 30, 2020 , including a decrease of
0.2 percentage points in the ratio for large losses of $1 million or more per
claim, discussed below.
Catastrophe losses and loss expenses accounted for 20.0 and 16.8 percentage
points of the combined ratio for the third quarter and first nine months of
2021, compared with 22.5 and 19.5 percentage points for the same periods a year
ago. The 10-year annual average catastrophe loss ratio for the personal lines
segment through 2020 was 11.2 percentage points, and the five-year annual
average was 11.1 percentage points.
In addition to the average rate increases discussed above, we continue to refine
our pricing to better match premiums to the risk of loss on individual policies.
Improved pricing precision and broad-based rate increases are expected to help
position the combined ratio at a profitable level over the long term. In
addition, greater geographic diversification is expected to reduce the
volatility of homeowner loss ratios attributable to weather-related catastrophe
losses over time.
The net effect of reserve development on prior accident years during the third
quarter and first nine months of 2021 was favorable for personal lines overall
by $3 million and $35 million , compared with less than $1 million of unfavorable
development for third-quarter 2020 and $28 million of favorable development for
the first nine months of 2020. Our personal auto line of business was the
primary contributor to the personal lines net favorable reserve development for
the first nine months of 2021. The net favorable reserve development was
primarily due to lower-than-anticipated loss emergence on known claims.
Reserve estimates are inherently
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uncertain as described in our 2020 Annual Report on Form 10-K, Item 7, Critical
Accounting Estimates, Property Casualty Insurance Loss and Loss Expense
Reserves, Page 56.
The personal lines underwriting expense ratio increased for the third quarter of
2021, compared with the same period a year ago, primarily due to an increase in
profit-sharing commissions for agencies. The underwriting expense ratio
decreased for the first nine months of 2021, compared with the same period a
year ago. The nine-month decrease reflected the second-quarter 2020 $16 million
Stay-at-Home policyholder credit for personal auto policies. The ratios also
included ongoing expense management efforts and premium growth outpacing growth
in expenses.
Personal Lines Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Current accident year losses greater
than $5 million $ 10 $ - nm $ 10 $ - nm
Current accident year losses $1
million - $5 million 12 21 (43) 31 42 (26)
Large loss prior accident year
reserve development (1) (2) 50 (4) 4 nm
Total large losses incurred 21 19 11 37 46 (20)
Losses incurred but not reported - (24) 100 37 41 (10)
Other losses excluding catastrophe
losses 154 156 (1) 442 388 14
Catastrophe losses 69 81 (15) 182 208 (13)
Total losses incurred $ 244 $ 232 5 $ 698 $ 683 2
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year losses greater
than $5 million 2.6 % - % 2.6 0.9 % - % 0.9
Current accident year losses $1
million - $5 million 2.9 5.8 (2.9) 2.7 3.8 (1.1)
Large loss prior accident year
reserve development (0.2) (0.7) 0.5 (0.4) 0.4 (0.8)
Total large loss ratio 5.3 5.1 0.2 3.2 4.2 (1.0)
Losses incurred but not reported (0.1) (6.6) 6.5 3.2 3.7 (0.5)
Other losses excluding catastrophe
losses 39.7 42.5 (2.8) 38.6 35.6 3.0
Catastrophe losses 17.7 22.1 (4.4) 15.9 19.1 (3.2)
Total loss ratio 62.6 % 63.1 % (0.5) 60.9 % 62.6 % (1.7)
We continue to monitor new losses and case reserve increases greater than $1
million for trends in factors such as initial reserve levels, loss cost
inflation and claim settlement expenses. Our analysis continues to indicate
no unexpected concentration of these large losses and case reserve increases by
risk category, geographic region, policy inception, agency or field marketing
territory. In the third quarter of 2021, the personal lines total large loss
ratio, net of reinsurance, was 0.2 percentage points higher than last year's
third quarter. The decrease in personal lines large losses for the first nine
months of 2021 occurred primarily for umbrella coverage in our homeowner line of
business. The third-quarter 2021 amount of total large losses incurred
unfavorably contributed to the decrease in the nine-month 2021 total large loss
ratio, compared with 2020, as it partially offset a first-half 2021 ratio that
was 1.6 points lower than the first half of 2020. We believe results for the
three- and nine-month periods largely reflected normal fluctuations in loss
patterns and normal variability in large case reserves for claims
above $1 million .
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EXCESS AND SURPLUS LINES INSURANCE RESULTS
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Earned premiums $ 105 $ 82 28 $ 289 $ 238 21
Fee revenues 1 - nm 2 1 100
Total revenues 106 82 29 291 239 22
Loss and loss expenses from:
Current accident year before
catastrophe losses 66 48 38 179 138 30
Current accident year catastrophe
losses 1 1 0 2 4 (50)
Prior accident years before
catastrophe losses 3 (1) nm 6 8 (25)
Prior accident years catastrophe
losses - - 0 - - 0
Loss and loss expenses 70 48 46 187 150 25
Underwriting expenses 29 23 26 79 70 13
Underwriting profit $ 7 $ 11 (36) $ 25 $ 19 32
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year before
catastrophe losses 62.6 % 58.5 % 4.1 61.9 % 57.8 % 4.1
Current accident year catastrophe
losses 0.4 1.0 (0.6) 0.7 1.7 (1.0)
Prior accident years before
catastrophe losses 3.3 (1.5) 4.8 2.1 3.4 (1.3)
Prior accident years catastrophe
losses (0.1) 0.2 (0.3) (0.1) 0.1 (0.2)
Loss and loss expenses 66.2 58.2 8.0 64.6 63.0 1.6
Underwriting expenses 27.9 28.5 (0.6) 27.3 29.5 (2.2)
Combined ratio 94.1 % 86.7 % 7.4 91.9 % 92.5 % (0.6)
Combined ratio 94.1 % 86.7 % 7.4 91.9 % 92.5 % (0.6)
Contribution from catastrophe
losses and
prior years reserve development 3.6 (0.3) 3.9 2.7 5.2 (2.5)
Combined ratio before catastrophe
losses and
prior years reserve development 90.5 % 87.0 % 3.5 89.2 % 87.3 % 1.9
Overview
The COVID-19 pandemic did not have a significant effect on our excess and
surplus lines insurance segment premiums during the third quarter or first nine
months of 2021, as net written premiums grew 30% for the quarter and 24% for the
nine-month period, compared with the same periods of 2020. 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 the first nine months of 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.
Performance highlights for the excess and surplus lines segment include:
•Premiums - Excess and surplus lines net written premiums continued to grow
during the third quarter and first nine months of 2021, compared with the same
periods a year ago, primarily due to an increase in agency renewal written
premiums. Renewal written premiums rose 28% for the nine months ended
September 30, 2021 , compared with the same period of 2020, reflecting the
opportunity to renew many accounts for the first time, as well as higher renewal
pricing. For the first nine months of 2021, excess and surplus lines policy
renewals experienced estimated average price increases at percentages in the
high-single-digit range, up from a mid-single-digit range in 2020. We measure
average changes in excess and
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surplus lines renewal pricing as the percentage 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 produced by agencies increased by 33% for the
third quarter and 17% for the first nine months of 2021 compared with the same
periods of 2020, as we continued to carefully underwrite each policy in a highly
competitive market. 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.
Excess and Surplus Lines Insurance Premiums
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Agency renewal written premiums $ 76 $ 60 27 $ 236 $ 185 28
Agency new business written
premiums 32 24 33 97 83 17
Other written premiums (4) (4) 0 (15) (12) (25)
Net written premiums 104 80 30 318 256 24
Unearned premium change 1 2 (50) (29) (18) (61)
Earned premiums $ 105 $ 82 28 $ 289 $ 238 21
•Combined ratio - The excess and surplus lines combined ratio increased by 7.4
percentage points for the third quarter of 2021, compared with the same period
of 2020, including an increase in the ratio for current accident year loss and
loss expenses before catastrophe losses and unfavorable reserve development on
prior accident years. The combined ratio decreased by 0.6 percentage points for
the first nine months of 2021, compared with the same period of 2020. The
nine-month 2021 decrease included a lower underwriting expense ratio and less
unfavorable effects from catastrophe losses and reserve development on prior
accident years that offset a higher ratio for current accident year loss and
loss expenses before catastrophe losses. The ratios for loss and loss expenses
before catastrophe losses reflected more prudent reserving, as claims on average
are remaining open longer than previously expected. The IBNR portion of the
total loss and loss expense ratio before catastrophe losses was 9.7 percentage
points higher for the first nine months of 2021, compared with the same period a
year ago, while the paid portion was 1.4 points lower and the case incurred
portion was 6.8 points lower.
The ratio for current accident year loss and loss expenses before catastrophe
losses for excess and surplus lines increased in the first nine months of 2021.
That 61.9% ratio was 4.1 percentage points higher, compared with the 57.8%
accident year 2020 ratio measured as of September 30, 2020 , including a decrease
of 0.2 percentage points in the ratio for large losses of $1 million or more per
claim, discussed below.
Excess and surplus lines net reserve development on prior accident years, as a
ratio to earned premiums, was an unfavorable 3.2% for third-quarter 2021 and
2.0% for the first nine months of 2021, compared with favorable net reserve
development of 1.3% for third-quarter 2020 and unfavorable development of 3.5%
for the first nine months of 2020. The $6 million of net unfavorable reserve
development recognized during the first nine months of 2021 included
approximately $5 million for accident years prior to 2019. Reserve estimates are
inherently uncertain as described in our 2020 Annual Report on Form 10-K,
Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss
Expense Reserves, Page 56.
The excess and surplus lines underwriting expense ratio decreased for the third
quarter and first nine months of 2021, compared with the same periods of 2020,
largely due to ongoing expense management efforts and premium growth outpacing
growth in expenses.
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Excess and Surplus Lines Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Current accident year losses greater
than $5 million $ - $ - nm $ - $ -
nm
Current accident year losses$1 million -$5 million - 5 (100) 8 7 14 Large loss prior accident year reserve development 2 - nm 2 (1) nm Total large losses incurred 2 5 (60) 10 6 67 Losses incurred but not reported 22 2 nm 45 20 125 Other losses excluding catastrophe losses 23 24 (4) 72 74 (3) Catastrophe losses 1 1 0 2 4 (50) Total losses incurred $ 48$ 32 50$ 129 $ 104 24 Ratios as a percent of earned premiums: Pt. Change Pt. Change Current accident year losses greater than$5 million - % - % 0.0 - % - % 0.0 Current accident year losses$1 million -$5 million (0.1) 6.4 (6.5) 2.8 3.0
(0.2)
Large loss prior accident year reserve development 1.9 0.1 1.8 0.6 (0.4) 1.0 Total large loss ratio 1.8 6.5 (4.7) 3.4 2.6 0.8 Losses incurred but not reported 21.2 2.6 18.6 15.5 8.4
7.1
Other losses excluding catastrophe losses 21.9 29.5 (7.6) 25.0 31.0 (6.0) Catastrophe losses 0.2 1.2 (1.0) 0.5 1.8 (1.3) Total loss ratio 45.1 % 39.8 % 5.3 44.4 % 43.8 % 0.6 We continue to monitor new losses and case reserve increases greater than$1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the third quarter of 2021, the excess and surplus lines total ratio for large losses, net of reinsurance, was 4.7 percentage points lower than last year's third quarter. The third-quarter 2021 amount of total large losses incurred partially offset a first-half 2021 ratio that was 3.7 points higher than the first half of 2020. We believe results for the three- and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above$1 million . Cincinnati Financial Corporation Third-Quarter 2021 10-Q Page 50 --------------------------------------------------------------------------------
LIFE INSURANCE RESULTS
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Earned premiums $ 73 $ 72 1 $ 221 $ 218 1
Fee revenues 1 - nm 3 1 200
Total revenues 74 72 3 224 219 2
Contract holders' benefits
incurred 84 72 17 249 224 11
Investment interest credited to
contract holders (26) (26) - (79) (77) (3)
Underwriting expenses incurred 21 20 5 63 63 -
Total benefits and expenses 79 66 20 233 210 11
Life insurance segment profit
(loss) $ (5) $ 6 nm $ (9) $ 9 nm
Overview
The COVID-19 pandemic did not have a significant effect on our life insurance
segment earned premiums or expenses for the first nine months of 2021. However,
the pandemic did contribute to a moderate increase in death claims in the first
nine months of 2021. Further, growth in worksite premiums, which originate from
enrollments at the workplace, have slowed to a small extent in recent quarters,
and could continue to slow in the future, due to curtailed enrollment activity.
It is also possible we may continue to experience higher than projected future
death claims due to the pandemic.
Performance highlights for the life insurance segment include:
•Revenues - Revenues increased for the nine months ended September 30, 2021 ,
compared with the same period a year ago, driven by higher earned premiums from
term life insurance, our largest life insurance product line.
Net in-force life insurance policy face amounts increased to $76.604 billion at
September 30, 2021 , from $73.475 billion at year-end 2020.
Fixed annuity deposits received for the three and nine months ended September
30, 2021 , were $8 million and $35 million , compared with $9 million and $33
million for the same periods of 2020. Fixed annuity deposits have a minimal
impact to earned premiums because deposits received are initially recorded as
liabilities. Profit is earned over time by way of interest rate spreads. We do
not write variable or equity-indexed annuities.
Life Insurance Premiums
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Term life insurance $ 53 $ 49 8 $ 156 $ 147 6
Universal life insurance 7 10 (30) 28 34 (18)
Other life insurance and annuity
products 13 13 0 37 37 0
Net earned premiums $ 73 $ 72 1 $ 221 $ 218 1
•Profitability - Our life insurance segment typically reports a small profit or
loss on a GAAP basis because profits from investment income spreads are included
in our investment segment results. We include only investment income credited to
contract holders (including interest assumed in life insurance policy reserve
calculations) in our life insurance segment results. A $9 million loss for our
life insurance segment in the first nine months of 2021, compared with profit of
$9 million for the same period of 2020, was primarily due to less favorable
mortality results as a result of higher death claims.
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Life insurance segment benefits and expenses consist principally of contract
holders' (policyholders') benefits incurred related to traditional life and
interest-sensitive products and operating expenses incurred, net of deferred
acquisition costs. Total benefits increased in the first nine months of 2021.
Life policy and investment contract reserves increased with continued growth in
net in-force life insurance policy face amounts and less favorable effects from
the unlocking of interest rate and other actuarial assumptions. Mortality
results increased, compared with the same period of 2020, and were above our
2021 projections, due in part to pandemic-related death claims.
Underwriting expenses for the first nine months of 2021 matched the same period
a year ago.
We recognize that assets under management, capital appreciation and investment
income are integral to evaluating 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, the life insurance company reported net income of $11 million
and $35 million for the three and nine months ended September 30, 2021 , compared
with net income of $18 million and $17 million for the third quarter and first
nine months of 2020. The life insurance company portfolio had net after-tax
investment gains of $3 million and $6 million for the three and nine months
ended September 30, 2021 , compared with a net after-tax investment gain of $1
million for the third quarter of 2020 and a net after-tax investment loss of $23
million for the nine months ended September 30, 2020 . The after-tax investment
losses for the nine months ended September 30, 2020 , were due to impairments of
fixed-maturity securities.
INVESTMENTS RESULTS
Overview
The investments segment contributes investment income and investment gains and
losses to results of operations. Investments traditionally are our primary
source of pretax and after-tax profits.
Investment Income
Pretax investment income grew 7% and 6% for the third quarter and first nine
months of 2021, compared with the same periods of 2020. Interest income
increased by $8 million and $17 million for the three and nine months ended
September 30, 2021 , as net purchases of fixed-maturity securities in recent
quarters generally offset the continuing effects of the low interest rate
environment. Higher dividend income reflected rising dividend rates and net
purchases of equity securities in recent quarters, helping dividend income to
grow by $6 million and $18 million for the three and nine months ended September
30, 2021 .
Investments Results
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Total investment income, net of
expenses $ 179 $ 167 7 $ 528 $ 498 6
Investment interest credited to
contract holders (26) (26) - (79) (77) (3)
Investment gains and losses, net (70) 533 nm 954 (132) nm
Investments profit (loss), pretax
(88)$ 1,403 $ 289 385 Cincinnati Financial Corporation Third-Quarter 2021 10-Q Page 52
-------------------------------------------------------------------------------- We continue to position our portfolio considering 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. The table below shows the average pretax yield-to-amortized cost associated with expected principal redemptions for our fixed-maturity portfolio. The expected principal redemptions are based on par amounts and include dated maturities, calls and prefunded municipal bonds that we expect will be called during each respective time period. (Dollars in millions) Principal At September 30, 2021 % Yield redemptions Fixed-maturity pretax yield profile: Expected to mature during the remainder of 2021 4.01 % $ 100 Expected to mature during 2022 3.79 782 Expected to mature during 2023 4.05 907 Average yield and total expected maturities from the remainder of 2021 through 2023 3.93$ 1,789 The table below shows the average pretax yield-to-amortized cost for fixed-maturity securities acquired during the periods indicated. The average yield for total fixed-maturity securities acquired during the first nine months of 2021 was lower than the 4.12% average yield-to-amortized cost of the fixed-maturity securities portfolio at the end of 2020. Our fixed-maturity portfolio's average yield of 4.07% for the first nine months of 2021, from the investment income table below, was also lower than the 4.12% yield for the year-end 2020 fixed-maturities portfolio. Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Average pretax yield-to-amortized cost on new
fixed-maturities:
Acquired taxable fixed-maturities 3.46 % 3.92 % 3.49 % 4.27 %
Acquired tax-exempt fixed-maturities 2.83 2.42 2.70 2.63
Average total fixed-maturities acquired 3.43 3.42 3.46 3.98
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 discussed our portfolio strategies in our 2020 Annual
Report on Form 10-K, Item 1, Investments Segment, Page 26, and Item 7,
Investments Outlook, Page 96. We discuss risks related to our investment income
and our fixed-maturity and equity investment portfolios in this quarterly report
Item 3, Quantitative and Qualitative Disclosures About Market Risk.
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The table below provides details about investment income. Average yields in this
table 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.
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Investment income:
Interest $ 121 $ 113 7 $ 356 $ 339 5
Dividends 61 55 11 179 161 11
Other 1 2 (50) 4 7 (43)
Less investment expenses 4 3 33 11 9 22
Investment income, pretax 179 167 7 528 498 6
Less income taxes 28 26 8 82 77 6
Total investment income, after-tax $ 151 $ 141 7 $ 446 $ 421 6
Investment returns:
Average invested assets plus cash
and cash
equivalents $ 23,263 $ 19,875 $ 22,420 $ 20,126
Average yield pretax 3.08 % 3.36 % 3.14 % 3.30 %
Average yield after-tax 2.60 2.84 2.65 2.79
Effective tax rate 15.6 15.5 15.5 15.5
Fixed-maturity returns:
Average amortized cost $ 11,931 $ 11,206 $ 11,673 $ 11,191
Average yield pretax 4.06 % 4.03 % 4.07 % 4.04 %
Average yield after-tax 3.37 3.36 3.38 3.37
Effective tax rate 16.9 16.6 16.8 16.6
Total Investment Gains and Losses
Investment gains and losses are recognized on the sale 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 are included in investment gains and losses and
also in net income. The change in unrealized gains or losses for fixed-maturity
securities are included as a component of other comprehensive income (OCI).
Accounting requirements for the allowance for credit losses for the
fixed-maturity portfolio are disclosed in our 2020 Annual Report on Form 10-K,
Item 8, Note 1, Summary of Significant Accounting Policies, Page 133.
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The table below summarizes total investment gains and losses, before taxes.
(Dollars in millions)
Three months ended
September
30, Nine months ended September 30,
2021 2020 2021 2020
Investment gains and losses:
Equity securities:
Investment gains and losses on securities
sold, net $ (1) $ 55 $ 6 $ 75
Unrealized gains and losses on securities
still held, net (104) 475 869 (130)
Subtotal (105) 530 875 (55)
Fixed maturities:
Gross realized gains 10 4 24 9
Gross realized losses (1) - (3) (3)
Write-down of impaired securities (1) (1) (1) (78)
Subtotal 8 3 20 (72)
Other 27 - 59 (5)
Total investment gains and losses reported
in net income (70) 533 954 (132)
Change in unrealized investment gains and
losses:
Fixed maturities (88) 112 (152) 294
Total $ (158) $ 645 $ 802 $ 162
Of the 4,285 fixed-maturity securities in the portfolio, one security was
trading below 70% of amortized cost at September 30, 2021 . Our asset impairment
committee regularly monitors the portfolio, including a quarterly
review of the entire portfolio for potential credit losses, resulting in charges
disclosed in the table below. We believe that if liquidity in the markets were
to significantly deteriorate or economic conditions were to significantly
weaken, we could experience declines in portfolio values and possibly increases
in the allowance for credit losses or write-downs to fair value.
The table below provides additional details for write-downs of impaired
securities. We had no allowance for credit losses for the first nine months of
2021 or 2020.
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Fixed maturities:
Energy $ - $ - $ - $ 62
Real estate - - - 13
Consumer goods - - - 1
Municipal 1 1 1 1
Technology & Electronics - - - 1
Total fixed maturities $ 1 $ 1 $ 1 $ 78
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OTHER
We report as Other the noninvestment operations of the parent company and a noninsurance subsidiary,CFC Investment Company . We also report as Other the underwriting results of Cincinnati Re and Cincinnati Global, including earned premiums, loss and loss expenses and underwriting expenses in the table below.
Total revenues for the first nine months of 2021 for our Other operations
increased, compared with the same period of 2020, primarily due to earned
premiums from Cincinnati Re and Cincinnati Global, with increases of
for the first nine months of 2021, primarily due to the combination of more
losses and loss expenses from Cincinnati Re and Cincinnati Global.
Other profit or loss in the table below represents profit or losses before
income taxes. Other loss resulted primarily from underwriting losses from the
combination of Cincinnati Re and Cincinnati Global, along with interest expense
from debt of the parent company.
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Interest and fees on loans and
leases $ 2 $ 1 100 $ 5 $ 4 25
Earned premiums 173 136 27 423 316 34
Other revenues 1 2 (50) 3 4 (25)
Total revenues 176 139 27 431 324 33
Interest expense 13 13 0 39 40 (3)
Loss and loss expenses 186 138 35 325 252 29
Underwriting expenses 45 38 18 121 95 27
Operating expenses 5 5 0 14 15 (7)
Total expenses 249 194 28 499 402 24
Total other loss $ (73) $ (55) (33) $ (68) $ (78) 13
TAXES
We had $31 million and $348 million of income tax expense for the three and nine
months ended September 30, 2021 , compared with $130 million and $16 million for
the same periods of 2020. The effective tax rate for the three and nine months
ended September 30, 2021 , was 16.8% and 19.1% compared with 21.2% and 8.7% for
the same periods last year. The change in our effective tax rate between periods
was 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 Tax-Exempt Fixed Maturities
in this quarterly report Item 3, Quantitative and Qualitative Disclosures About
Market Risk 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. Details about our effective tax rate are in this quarterly
report Item 1, Note 9, Income Taxes.
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2021 , shareholders' equity was $11.841 billion , compared with
$10.789 billion at December 31, 2020 . Total debt was $848 million at September
30, 2021 , up $6 million from December 31, 2020 . At September 30, 2021 , cash and
cash equivalents totaled $1.085 billion , compared with $900 million at
December 31, 2020 .
The pandemic did not have a significant effect on our cash flows for the first
nine months of 2021. In addition to our historically positive operating cash
flow to meet the needs of operations, we have the ability to sell a portion of
our high-quality, liquid investment portfolio or slow investing activities if
such need arises. We also have additional capacity to borrow on our revolving
short-term line of credit, as described further below.
SOURCES OF LIQUIDITY
Subsidiary Dividends Our lead insurance subsidiary declared dividends of$358 million to the parent company in the first nine months of 2021, compared with$325 million for the same period of 2020. For full-year 2020, subsidiary dividends declared totaled$550 million .State of Ohio regulatory requirements restrict the dividends our insurance subsidiary can pay. For full-year 2021, total dividends that our insurance subsidiary can pay to our parent company without regulatory approval are approximately$583 million . Investing Activities Investment income is a source of liquidity for both the parent company and its insurance subsidiaries. We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth. Parent company obligations can be funded with income on investments held at the parent-company level or through sales of securities in that portfolio, although our investment philosophy seeks to compound cash flows over the long term. These sources of capital can help minimize subsidiary dividends to the parent company, protecting insurance subsidiary capital.
For a discussion of our historic investment strategy, portfolio allocation
and quality, see our 2020 Annual Report on Form 10-K, Item 1, Investments
Segment, Page 26.
Insurance Underwriting Our property casualty and life insurance underwriting operations provide liquidity because we generally receive premiums before paying losses under the policies purchased with those premiums. After satisfying our cash requirements, we use excess cash flows for investment, increasing future investment income.
Historically, cash receipts from property casualty and life insurance premiums,
along with investment income, have been more than sufficient to pay claims,
operating expenses and dividends to the parent company.
The table below shows a summary of the operating cash flow for property casualty
insurance (direct method):
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2021 2020 % Change 2021 2020 % Change
Premiums collected $ 1,634 $ 1,457 12 $ 4,725 $ 4,442 6
Loss and loss expenses paid (765) (779) 2 (2,237) (2,347) 5
Commissions and other underwriting
expenses paid (430) (397) (8) (1,434) (1,385) (4)
Cash flow from underwriting 439 281 56 1,054 710 48
Investment income received 125 117 7 366 346 6
Cash flow from operations $ 564 $ 398 42 $ 1,420 $ 1,056 34
Collected premiums for property casualty insurance rose $283 million during the
first nine months of 2021, compared with the same period in 2020. Loss and loss
expenses paid for the 2021 period decreased $110 million . Commissions and other
underwriting expenses paid increased $49 million .
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We discuss our future obligations for claims payments and for underwriting
expenses in our 2020 Annual Report on Form 10-K, Item 7, Contractual
Obligations, Page 102, and Other Commitments also on Page 102.
Capital Resources AtSeptember 30, 2021 , our debt-to-total-capital ratio was 6.7%, considerably below our 35% covenant threshold, with$789 million in long-term debt and$59 million in borrowing on our revolving short-term line of credit. AtSeptember 30, 2021 ,$241 million was available for future cash management needs as part of the general provisions of the line of credit agreement, with another$300 million available as part of an accordion feature. Based on our capital requirements atSeptember 30, 2021 , we do not anticipate a material increase in debt levels exceeding the available line of credit amount during the remainder of the year. As a result, we expect changes in our debt-to-total-capital ratio to continue to be largely a function of the contribution of unrealized investment gains or losses to shareholders' equity. We have an unsecured letter of credit agreement which provides a portion of the capital needed to support Cincinnati Global's obligations at Lloyd's. The amount of this unsecured letter of credit agreement was$94 million atSeptember 30, 2021 , with no amounts drawn.
We provide details of our three long-term notes in this quarterly report Item 1,
Note 3, Fair Value Measurements. None of the notes are encumbered by rating
triggers.
Four independent ratings firms award insurer financial strength ratings to our property casualty insurance companies and three firms rate our life insurance company. Those firms made no changes to our parent company debt ratings during the first nine months of 2021. Our debt ratings are discussed in our 2020 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, Long-Term Debt, Page 101. 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. Similarly, the company holds no fair-value contracts for which a lack of marketplace quotations would necessitate the use of fair-value techniques. USES OF LIQUIDITY Our parent company and insurance subsidiary have contractual obligations and other commitments. In addition, one of our primary uses of cash is to enhance shareholder return. Contractual Obligations We estimated our future contractual obligations as ofDecember 31, 2020 , in our 2020 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 102. There have been no material changes to our estimates of future contractual obligations since our 2020 Annual Report on Form 10-K. Other Commitments In addition to our contractual obligations, we have other property casualty operational commitments. •Commissions - Commissions paid were$934 million in the first nine months of 2021. Commission payments generally track with written premiums, except for annual profit-sharing commissions typically paid during the first quarter of the year. •Other underwriting expenses - Many of our underwriting expenses are not contractual obligations, but reflect the ongoing expenses of our business. Noncommission underwriting expenses paid were$500 million in the first nine months of 2021. There were no contributions to our qualified pension plan during the first nine months of 2021. Cincinnati Financial Corporation Third-Quarter 2021 10-Q Page 58 -------------------------------------------------------------------------------- Investing Activities After fulfilling operating requirements, we invest cash flows from underwriting, investment and other corporate activities in fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We discuss our investment strategy and certain portfolio attributes in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk. Uses of Capital Uses of cash to enhance shareholder return include dividends to shareholders. InJanuary 2021 , the board of directors declared regular quarterly cash dividends of63 cents per share for an indicated annual rate of$2.52 per share. During the first nine months of 2021, we used$295 million to pay cash dividends to shareholders. 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 other property casualty insurance operations, the following table details gross reserves among case, IBNR (incurred but not reported) and loss expense reserves, net of salvage and subrogation reserves. Reserving practices are discussed in our 2020 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves, Page 103. Total gross reserves atSeptember 30, 2021 , increased$549 million compared withDecember 31, 2020 . Case loss reserves for losses increased by$204 million , IBNR loss reserves increased by$305 million and loss expense reserves increased by$40 million . The total gross increase was primarily due to our commercial casualty and homeowner lines of business, and also Cincinnati Re. Cincinnati Financial Corporation Third-Quarter 2021 10-Q Page 59 -------------------------------------------------------------------------------- Property Casualty Gross Reserves (Dollars in millions) Loss
reserves
Case IBNR Loss expense Total gross Percent of
At September 30, 2021 reserves reserves reserves reserves total
Commercial lines insurance:
Commercial casualty $ 1,053 $ 747 $ 700 $ 2,500 34.6 %
Commercial property 314 132 59 505 7.0
Commercial auto 414 217 121 752 10.4
Workers' compensation 437 501 85 1,023 14.2
Other commercial 96 10 106 212 2.9
Subtotal 2,314 1,607 1,071 4,992 69.1
Personal lines insurance:
Personal auto 211 66 61 338 4.7
Homeowner 196 117 45 358 4.9
Other personal 73 94 5 172 2.4
Subtotal 480 277 111 868 12.0
Excess and surplus lines 211 177 149 537 7.4
Cincinnati Re 91 482 4 577 8.0
Cincinnati Global 132 117 3 252 3.5
Total $ 3,228 $ 2,660 $ 1,338 $ 7,226 100.0 %
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 %
LIFE POLICY AND INVESTMENT CONTRACT RESERVES
Gross life policy and investment contract reserves were $2.999 billion at
September 30, 2021 , compared with $2.915 billion at year-end 2020, reflecting
continued growth in life insurance policies in force. We discuss our life
insurance reserving practices in our 2020 Annual Report on Form 10-K, Item 7,
Life Insurance Policyholder Obligations and Reserves, Page 109.
Cincinnati Financial Corporation Third-Quarter 2021 10-Q
Page 60
--------------------------------------------------------------------------------
OTHER MATTERS
SIGNIFICANT ACCOUNTING POLICIES Our significant accounting policies are discussed in our 2020 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 133, and updated in this quarterly report Item 1, Note 1, Accounting Policies.
In conjunction with those discussions, in the Management's Discussion and
Analysis in the 2020 Annual Report on Form 10-K, management reviewed the
estimates and assumptions used to develop reported amounts related to the most
significant policies. Management discussed the development and selection of
those accounting estimates with the audit committee of the board of directors.
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