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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 2021 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 2021 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 32.
Factors that could cause or contribute to such differences include, but are not
limited to:
•Effects of the COVID-19 pandemic that could affect results for reasons such as:
•Securities market disruption or volatility and related effects such as
decreased economic activity and continued supply chain disruptions that affect
our investment portfolio and book value
•An unusually high level of claims in our insurance or reinsurance operations
that increase litigation-related expenses
•An unusually high level of insurance losses, including risk of legislation or court decisions extending business interruption insurance in commercial property coverage forms to cover claims for pure economic loss related to the COVID-19 pandemic
•Decreased premium revenue and cash flow from disruption to our distribution
channel of independent agents, consumer self-isolation, travel limitations,
business restrictions and decreased economic activity
•Inability of our workforce, agencies or vendors to perform necessary business
functions
•Ongoing developments concerning business interruption insurance claims and litigation related to the COVID-19 pandemic that affect our estimates of losses and loss adjustment expenses or our ability to reasonably estimate such losses, such as:
•The continuing duration of the pandemic and governmental actions to limit the
spread of the virus that may produce additional economic losses
•The number of policyholders that will ultimately submit claims or file lawsuits
•The lack of submitted proofs of loss for allegedly covered claims
•Judicial rulings in similar litigation involving other companies in the
insurance industry
•Differences in state laws and developing case law
•Litigation trends, including varying legal theories advanced by policyholders
•Whether and to what degree any class of policyholders may be certified
•The inherent unpredictability of litigation
•Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns (whether as a result of global climate change or otherwise), environmental events, terrorism incidents, cyberattacks, civil unrest or other causes •Increased frequency and/or severity of claims or development of claims that are unforeseen at the time of policy issuance, due to inflationary trends or other causes
•Inadequate estimates or assumptions, or reliance on third-party data used for
critical accounting estimates
•Declines in overall stock market values negatively affecting our equity
portfolio and book value
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•Prolonged low interest rate environment or other factors that limit our ability
to generate growth in investment income or interest rate fluctuations that
result in declining values of fixed-maturity investments, including declines in
accounts in which we hold bank-owned life insurance contract assets
•Domestic and global events, such as Russia's invasion of Ukraine , resulting in
capital market or credit market uncertainty, followed by prolonged periods of
economic instability or recession, that lead to:
•Significant or prolonged decline in the fair value of a particular security or
group of securities and impairment of the asset(s)
•Significant decline in investment income due to reduced or eliminated dividend
payouts from a particular security or group of securities
•Significant rise in losses from surety or director and officer policies written
for financial institutions or other insured entities
•Our inability to manage Cincinnati Global or other subsidiaries to produce
related business opportunities and growth prospects for our ongoing operations
•Recession, prolonged elevated inflation or other economic conditions resulting
in lower demand for insurance products or increased payment delinquencies
•Ineffective information technology systems or discontinuing to develop and
implement improvements in technology may impact our success and profitability
•Difficulties with technology or data security breaches, including cyberattacks, that could negatively affect our or our agents' ability to conduct business; disrupt our relationships with agents, policyholders and others; cause reputational damage, mitigation expenses and data loss and expose us to liability under federal and state laws •Difficulties with our operations and technology that may negatively impact our ability to conduct business, including cloud-based data information storage, data security, cyberattacks, remote working capabilities, and/or outsourcing relationships and third-party operations and data security
•Disruption of the insurance market caused by technology innovations such as
driverless cars that could decrease consumer demand for insurance products
•Delays, inadequate data developed internally or from third parties, or performance inadequacies from ongoing development and implementation of underwriting and pricing methods, including telematics and other usage-based insurance methods, or technology projects and enhancements expected to increase our pricing accuracy, underwriting profit and competitiveness •Intense competition, and the impact of innovation, technological change and changing customer preferences on the insurance industry and the markets in which we operate, could harm our ability to maintain or increase our ability to maintain or increase our business volumes and profitability
•Changing consumer insurance-buying habits and consolidation of independent
insurance agencies could alter our competitive advantages
•Inability to obtain adequate ceded reinsurance on acceptable terms, amount of
reinsurance coverage purchased, financial strength of reinsurers and the
potential for nonpayment or delay in payment by reinsurers
•Inability to defer policy acquisition costs for any business segment if pricing and loss trends would lead management to conclude that segment could not achieve sustainable profitability
•Inability of our subsidiaries to pay dividends consistent with current or past
levels
•Events or conditions that could weaken or harm our relationships with our independent agencies and hamper opportunities to add new agencies, resulting in limitations on our opportunities for growth, such as:
•Downgrades of our financial strength ratings
•Concerns that doing business with us is too difficult
•Perceptions that our level of service, particularly claims service, is no
longer a distinguishing characteristic in the marketplace
•Inability or unwillingness to nimbly develop and introduce coverage product updates and innovations that our competitors offer and consumers expect to find in the marketplace
•Actions of insurance departments, state attorneys general or other regulatory
agencies, including a change to a federal system of regulation from a
state-based system, that:
•Impose new obligations on us that increase our expenses or change the
assumptions underlying our critical accounting estimates
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•Place the insurance industry under greater regulatory scrutiny or result in new
statutes, rules and regulations
•Restrict our ability to exit or reduce writings of unprofitable coverages or
lines of business
•Add assessments for guaranty funds, other insurancerelated assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes
•Increase our provision for federal income taxes due to changes in tax law
•Increase our other expenses
•Limit our ability to set fair, adequate and reasonable rates
•Place us at a disadvantage in the marketplace
•Restrict our ability to execute our business model, including the way we
compensate agents
•Adverse outcomes from litigation or administrative proceedings, including
effects of social inflation on the size of litigation awards
•Events or actions, including unauthorized intentional circumvention of
controls, that reduce our future ability to maintain effective internal control
over financial reporting under the Sarbanes-Oxley Act of 2002
•Unforeseen departure of certain executive officers or other key employees due
to retirement, health or other causes that could interrupt progress toward
important strategic goals or diminish the effectiveness of certain longstanding
relationships with insurance agents and others
•Our inability, or the inability of our independent agents, to attract and
retain personnel in a competitve labor market, impacting the customer experience
and altering our competitive advantages
•Events, such as an epidemic, natural catastrophe or terrorism, that could
hamper our ability to assemble our workforce at our headquarters location or
work effectively in a remote environment
Further, our insurance businesses are subject to the effects of changing social,
global, economic and regulatory environments. Public and regulatory initiatives
have included efforts to adversely influence and restrict premium rates,
restrict the ability to cancel policies, impose underwriting standards and
expand overall regulation. We also are subject to public and regulatory
initiatives that can affect the market value for our common stock, such as
measures affecting corporate financial reporting and governance. The ultimate
changes and eventual effects, if any, of these initiatives are uncertain.
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CORPORATE FINANCIAL HIGHLIGHTS
Net Income and Comprehensive Income Data
Three months ended
(Dollars in millions, except per share data) March 31,
2022 2021 % Change
Earned premiums $ 1,690 $ 1,544 9
Investment income, net of expenses (pretax) 185 174 6
Investment gains and losses, net (pretax) (666) 504 nm
Total revenues 1,215 2,227 (45)
Net income (loss) (273) 620 nm
Comprehensive income (loss) (862) 476 nm
Net income (loss) per share-diluted (1.70) 3.82 nm
Cash dividends declared per share 0.69 0.63 10
Diluted weighted average shares outstanding 160.4 162.5 (1)
Total revenues decreased 45% for the first quarter of 2022, compared with the
first quarter of 2021, as a reduction in net investment gains offset increases
in earned premiums and investment income. 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.
The net loss for the first quarter of 2022, compared with first-quarter 2021 net
income, was a change of $893 million , including a decrease of $924 million in
after-tax net investment gains that offset increases of $25 million in after-tax
property casualty underwriting income and $9 million in after-tax investment
income. Catastrophe losses for the first quarter of 2022, mostly weather
related, were $98 million lower after taxes and favorably affected both net
income and property casualty underwriting income. Life insurance segment results
on a pretax basis matched first-quarter 2021.
During the first three months of 2022, SARS-CoV-2, also known as COVID-19 and
recognized as a pandemic by the World Health Organization , continued to cause
various effects in parts of the world. We believe it did not have a significant
effect on our premium revenues during the first three months of 2022 and there
were no material changes to our estimates for incurred losses and expenses
related to the pandemic.
Performance by segment is discussed below in Financial Results. As discussed in
our 2021 Annual Report on Form 10-K, Item 7, Executive Summary, Page 47, there
are several reasons why our performance during 2022 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 2021, the
company had increased the annual cash dividend rate for 61 consecutive years, a
record we believe is matched by only seven other U.S. publicly traded companies.
In January 2022 , the board of directors increased the regular quarterly dividend
to 69 cents per share, setting the stage for our 62nd consecutive year of
increasing cash dividends. During the first three months of 2022, cash dividends
declared by the company increased 10% compared with the same period of 2021.
Our board regularly evaluates relevant factors in decisions related to dividends
and share repurchases. The 2022 dividend increase reflected our strong
operating performance and signaled management's and the board's positive outlook
and confidence in our outstanding capital, liquidity and financial flexibility.
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Balance Sheet Data and Performance Measures
(Dollars in millions, except share data) At March 31, At December 31,
2022 2021
Total investments $ 23,399 $ 24,666
Total assets 30,250 31,387
Short-term debt 49 54
Long-term debt 789 789
Shareholders' equity 12,092 13,105
Book value per share 75.43 81.72
Debt-to-total-capital ratio 6.5 % 6.0 %
Total assets at March 31, 2022 , decreased 4% compared with year-end 2021, and
included a 5% decrease in total investments that reflected net purchases that
were offset by lower fair values for many securities in our portfolio.
Shareholders' equity decreased 8% and book value per share also decreased 8%
during the first three months of 2022. Our debt-to-total-capital ratio
(capital is the sum of debt plus shareholders' equity) increased compared with
year-end 2021.
Our value creation ratio is our primary performance metric. That ratio was
negative 6.9% for the first three months of 2022, and was less than the same
period in 2021 due to a reduction in overall net gains from our investment
portfolio. The $6.29 decrease in book value per share during the
first three months of 2022 contributed negative 7.7 percentage points to the
value creation ratio, while dividends declared at $0.69 per share contributed
positive 0.8 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
2022 2021
Value creation ratio major components:
Net income before investment gains 1.9 % 2.1 %
Change in fixed-maturity securities, realized and unrealized
gains
(4.5) (1.4)
Change in equity securities, investment gains (4.1) 3.6
Other (0.2) (0.2)
Value creation ratio (6.9) % 4.1 %
Cincinnati Financial Corporation First-Quarter 2022 10-Q
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Three months ended
(Dollars are per share) March 31,
2022 2021
Value creation ratio:
End of period book value* $ 75.43 $ 69.16
Less beginning of period book value 81.72 67.04
Change in book value (6.29) 2.12
Dividend declared to shareholders 0.69 0.63
Total value creation
Value creation ratio from change in book value** (7.7) % 3.2 % Value creation ratio from dividends declared to shareholders*** 0.8 0.9 Value creation ratio (6.9) % 4.1 %
* 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 2021 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 2021 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 6. AtMarch 31, 2022 , we actively marketed through 1,946 agencies located in 46 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 2021 Annual Report on Form 10-K, Item 7, Executive Summary, Page 47, 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 three months of 2022, our consolidated property casualty net written premium year-over-year growth was 12%. As ofFebruary 2022 ,A.M. Best projected the industry's full-year 2022 written premium growth at approximately 6%. For the five-year period 2017 through 2021, 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 three months of 2022, our GAAP combined ratio was 89.9%, including 3.1 percentage points of current accident year catastrophe losses partially offset by 2.5 percentage points of favorable loss reserve development on prior accident years. Our statutory combined ratio was 88.0% for the first three months of 2022. As ofFebruary 2022 ,A.M. Best projected the industry's full-year 2022 statutory combined ratio at approximately 101%, including approximately 7 percentage points of catastrophe losses and less than 1 percentage point of loss reserve development on prior accident years. 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 three months of 2022, pretax investment income was$185 million , up 6% compared with the same period in 2021. We believe our investment portfolio mix provides an appropriate balance of income stability and growth with capital appreciation potential. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 31 --------------------------------------------------------------------------------
Financial Strength
An important part of our long-term strategy is financial strength, which is described in our 2021 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Financial Strength, Page 8. 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 2021 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, 2022 Reinsurance Ceded Programs, Page 104. 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. AtMarch 31, 2022 , we held$4.777 billion of our cash and cash equivalents and invested assets at the parent-company level, of which$4.509 billion , or 94.4%, was invested in common stocks, and$137 million , or 2.9%, was cash or cash equivalents. Our debt-to-total-capital ratio was 6.5% atMarch 31, 2022 . Another important indicator of financial strength is our ratio of property casualty net written premiums to statutory surplus, which was 1.0-to-1 for the 12 months endedMarch 31, 2022 , compared with 0.9-to-1 at year-end 2021. 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.
At
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 tier
A.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.com
S&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 ourLondon -based global specialty underwriter Cincinnati Global Underwriting Ltd.SM (Cincinnati Global). Three months ended March (Dollars in millions) 31, 2022 2021 % Change Earned premiums$ 1,618 $ 1,475 10 Fee revenues 3 2 50 Total revenues 1,621 1,477 10 Loss and loss expenses from: Current accident year before catastrophe losses 947 850 11 Current accident year catastrophe losses 50 183 (73) Prior accident years before catastrophe losses (20) (80) 75 Prior accident years catastrophe losses (21) (30) 30 Loss and loss expenses 956 923 4 Underwriting expenses 500 421 19 Underwriting profit$ 165 $ 133 24 Ratios as a percent of earned premiums: Pt. Change Current accident year before catastrophe losses 58.5 % 57.6 % 0.9 Current accident year catastrophe losses 3.1 12.4 (9.3) Prior accident years before catastrophe losses (1.2) (5.4) 4.2 Prior accident years catastrophe losses (1.3) (2.0) 0.7 Loss and loss expenses 59.1 62.6 (3.5) Underwriting expenses 30.8 28.6 2.2 Combined ratio 89.9 % 91.2 % (1.3) Combined ratio 89.9 % 91.2 % (1.3)
Contribution from catastrophe losses and prior years
reserve development
0.6 5.0 (4.4) Combined ratio before catastrophe losses and prior years reserve development 89.3 % 86.2 % 3.1 Our consolidated property casualty insurance operations generated an underwriting profit of$165 million for the first three months of 2022. The improvement of$32 million , compared with the same period of 2021, included a favorable decrease of$124 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 at
year-end 2021, including an increase of
reported (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 first quarter of 2022
improved by 1.3 percentage points, compared with the same period of 2021,
including a decrease of 8.6 points from lower catastrophe losses and loss
expenses. Other combined ratio components that increased are discussed below and
in further detail in Financial Results by property casualty insurance segment.
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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 2.5 percentage points in
the first three months of 2022, compared with 7.4 percentage points in the same
period of 2021. 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 increased in the first three months of 2022. That 58.5% ratio was
0.9 percentage points higher, compared with the 57.6% accident year 2021 ratio
measured as of March 31, 2021 , including an increase of 4.0 points in the ratio
for large losses of $1 million or more per claim, discussed below.
The underwriting expense ratio increased for the first quarter of 2022, compared
with the same period a year ago, primarily due to an increase in profit-sharing
commissions for agencies and related expenses. The ratio also included ongoing
expense management efforts and higher earned premiums.
Consolidated Property Casualty Insurance Premiums
Three months ended
(Dollars in millions) March 31,
2022 2021 % Change
Agency renewal written premiums $ 1,397 $ 1,276 9
Agency new business written premiums 244 220 11
Other written premiums 258 197 31
Net written premiums 1,899 1,693 12
Unearned premium change (281) (218) (29)
Earned premiums $ 1,618 $ 1,475 10
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 2022, are discussed in more detail by segment below
in Financial Results.
Consolidated property casualty net written premiums for the three months ended
March 31, 2022 , grew $206 million compared with the same period of 2021. 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
$24 million for the first quarter of 2022, compared with the same period of
2021. New agency appointments during 2022 and 2021 produced a $13 million
increase in standard lines new business for the first three months of 2022
compared with the same period of 2021. 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
with the same period of 2021, to
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
compared with the same period of 2021, to
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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 $7 million for the first three months of 2022, compared with the
same period of 2021.
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 1.8 percentage points to the combined ratio
in the first three months of 2022, compared with 10.4 percentage points in the
same period of 2021.
The reinsurance program for Cincinnati Re which went into effect on June 1,
2021 , provided no additional recoveries during the first three months of 2022.
As of March 31, 2022 , it provided an estimated recovery of $14 million from
Hurricane Ida, with a net incurred loss of $80 million for Cincinnati Re,
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.
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 ended March 31,
Comm. Pers. E&S
Dates Region lines lines lines Other Total
2022
Jan. 15-17 Northeast, South $ 4 $ 6 $ 1 $ - $ 11
All other 2022 catastrophes 12 22 - 5 39
Development on 2021 and prior catastrophes (3) (21) - 3 (21)
Calendar year incurred total $ 13 $ 7 $ 1 $ 8 $ 29
2021
Feb. 12-15 South, West $ 10 $ 6 $ - $ 49 $ 65
Feb. 16-20 Midwest, Northeast, South 22 37 1 1 61
Mar. 24-26 Midwest, Northeast, South 8 19 - - 27
Mar. 27-29 Midwest, Northeast, South 4 8 - - 12
All other 2021 catastrophes 10 8 - - 18
Development on 2020 and prior catastrophes (17) (3) - (10) (30)
Calendar year incurred total $ 37 $ 75 $ 1 $ 40 $ 153
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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
Three months ended
(Dollars in millions, net of reinsurance)
2022 2021 % Change
Current accident year losses greater than $5 million $ 23 $ 5 360
Current accident year losses $1 million - $5 million 82 31 165
Large loss prior accident year reserve development 25 24 4
Total large losses incurred 130 60 117
Losses incurred but not reported 36 102 (65)
Other losses excluding catastrophe losses 592 451 31
Catastrophe losses 24 150 (84)
Total losses incurred $ 782 $ 763 2
Ratios as a percent of earned premiums: Pt. Change
Current accident year losses greater than $5 million 1.4 % 0.3 % 1.1
Current accident year losses $1 million - $5 million 5.1 2.2 2.9
Large loss prior accident year reserve development 1.5 1.6 (0.1)
Total large loss ratio 8.0 4.1 3.9
Losses incurred but not reported 2.2 6.9 (4.7)
Other losses excluding catastrophe losses 36.6 30.5 6.1
Catastrophe losses 1.5 10.2 (8.7)
Total loss ratio 48.3 % 51.7 % (3.4)
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 first-quarter 2022 property casualty total large losses incurred
of $130 million , net of reinsurance, were higher than the $116 million quarterly
average during full-year 2021 and the $60 million experienced for the
first quarter of 2021. The ratio for these large losses was 3.9 percentage
points higher compared with last year's first quarter. We believe results for
the three-month period 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
Three months ended
(Dollars in millions) March 31,
2022 2021 % Change
Earned premiums $ 962 $ 886 9
Fee revenues 1 1 0
Total revenues 963 887 9
Loss and loss expenses from:
Current accident year before catastrophe losses 588 532 11
Current accident year catastrophe losses 16 54 (70)
Prior accident years before catastrophe losses (15) (66) 77
Prior accident years catastrophe losses (3) (17) 82
Loss and loss expenses 586 503 17
Underwriting expenses 301 254 19
Underwriting profit $ 76 $ 130 (42)
Ratios as a percent of earned premiums: Pt. Change
Current accident year before catastrophe losses 61.2 % 60.0 % 1.2
Current accident year catastrophe losses 1.7 6.1 (4.4)
Prior accident years before catastrophe losses (1.6) (7.5) 5.9
Prior accident years catastrophe losses (0.3) (1.9) 1.6
Loss and loss expenses 61.0 56.7 4.3
Underwriting expenses 31.3 28.7 2.6
Combined ratio 92.3 % 85.4 % 6.9
Combined ratio 92.3 % 85.4 % 6.9
Contribution from catastrophe losses and prior years
reserve development
(0.2) (3.3) 3.1 Combined ratio before catastrophe losses and prior years reserve development 92.5 % 88.7 % 3.8 Overview
Performance highlights for the commercial lines segment include:
•Premiums - Earned premiums and net written premiums for the commercial lines segment grew during the first three months of 2022, compared with the same period 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 8% for the first quarter of 2022, compared with the same period of 2021. During the first quarter of 2022, our overall standard commercial lines policies averaged estimated renewal price increases at percentages in 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
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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
first quarter of 2022, we estimate that our average percentage price increases
were as follows: commercial property in 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 three months of 2022 contributed $21 million to net written premiums,
compared with $11 million for the same period of 2021.
New business written premiums for commercial lines increased $11 million during
the first three months of 2022, compared with the same period of 2021. 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
the first three months of 2022, compared with the same period of 2021.
Commercial Lines Insurance Premiums
Three months ended
(Dollars in millions) March 31,
2022 2021 % Change
Agency renewal written premiums $ 970 $ 898 8
Agency new business written premiums 156 145 8
Other written premiums (30) (24) (25)
Net written premiums 1,096 1,019 8
Unearned premium change (134) (133) (1)
Earned premiums $ 962 $ 886 9
•Combined ratio - The commercial lines combined ratio for the first quarter of
2022 increased by 6.9 percentage points, compared with first-quarter 2021,
including a decrease of 2.8 points in losses from catastrophes. Underwriting
results also included a higher ratio for loss experience for the current
accident year and a lower 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 increased in the first three months of 2022. That
61.2% ratio was 1.2 percentage points higher, compared with the 60.0% accident
year 2021 ratio measured as of March 31, 2021 , including an increase of
5.1 percentage points in the ratio for large losses of $1 million or more per
claim, discussed below.
Catastrophe losses and loss expenses accounted for 1.4 percentage points of the
combined ratio for the first three months of 2022, compared with 4.2 percentage
points for the same period a year ago. Through 2021, the 10-year annual average
for that catastrophe measure for the commercial lines segment was 5.5 percentage
points, and the five-year annual average was 5.8 percentage points.
The net effect of reserve development on prior accident years during the first
three months of 2022 was favorable for commercial lines overall by $18 million ,
compared with $83 million for the same period in 2021. For the first three
months of 2022, our workers' compensation and commercial auto 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 three months of 2022 for our commercial lines
insurance segment was primarily for accident years 2020 and 2021 and was
primarily due to lower-than-anticipated loss emergence on known claims. Reserve
estimates are inherently uncertain as described in our 2021 Annual Report on
Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance
Loss and Loss Expense Reserves, Page 52.
The commercial lines underwriting expense ratio increased for the first quarter
of 2022, compared with the same period a year ago, primarily due to an increase
in profit-sharing commissions for agencies and related expenses. The ratio also
included ongoing expense management efforts and higher earned premiums.
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Commercial Lines Insurance Losses Incurred by Size
Three months ended
(Dollars in millions, net of reinsurance)
2022 2021 % Change
Current accident year losses greater than $5 million $ 16 $ 5 220
Current accident year losses $1 million - $5 million 67 26 158
Large loss prior accident year reserve development 21 26 (19)
Total large losses incurred 104 57 82
Losses incurred but not reported 38 39 (3)
Other losses excluding catastrophe losses 318 261 22
Catastrophe losses 11 35 (69)
Total losses incurred $ 471 $ 392 20
Ratios as a percent of earned premiums: Pt. Change
Current accident year losses greater than $5 million 1.7 % 0.6 % 1.1
Current accident year losses $1 million - $5 million 6.9 2.9 4.0
Large loss prior accident year reserve development 2.1 3.0 (0.9)
Total large loss ratio 10.7 6.5 4.2
Losses incurred but not reported 4.0 4.3 (0.3)
Other losses excluding catastrophe losses 33.0 29.4 3.6
Catastrophe losses 1.2 4.0 (2.8)
Total loss ratio 48.9 % 44.2 % 4.7
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. The first-quarter 2022 commercial lines total large losses incurred
of $104 million , net of reinsurance, were higher than the quarterly average of
$95 million during full-year 2021 and the $57 million of total large losses
incurred for the first quarter of 2021. The increase in commercial lines large
losses for the first three months of 2022 was primarily due to our commercial
property line of business. The first-quarter 2022 ratio for commercial lines
total large losses was 4.2 percentage points higher than last year's
first-quarter ratio. We believe results for the three-month period
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
Three months ended
(Dollars in millions) March 31,
2022 2021 % Change
Earned premiums $ 402 $ 376 7
Fee revenues 1 1 0
Total revenues 403 377 7
Loss and loss expenses from:
Current accident year before catastrophe losses 221 215 3
Current accident year catastrophe losses 28 78 (64)
Prior accident years before catastrophe losses (13) (17) 24
Prior accident years catastrophe losses (21) (3) (600)
Loss and loss expenses 215 273 (21)
Underwriting expenses 123 107 15
Underwriting profit (loss) $ 65 $ (3) nm
Ratios as a percent of earned premiums: Pt. Change
Current accident year before catastrophe losses 55.0 % 57.3 % (2.3)
Current accident year catastrophe losses 6.9 20.6 (13.7)
Prior accident years before catastrophe losses (3.2) (4.5) 1.3
Prior accident years catastrophe losses (5.2) (0.8) (4.4)
Loss and loss expenses 53.5 72.6 (19.1)
Underwriting expenses 30.4 28.5 1.9
Combined ratio 83.9 % 101.1 % (17.2)
Combined ratio 83.9 % 101.1 % (17.2)
Contribution from catastrophe losses and prior years
reserve development
(1.5) 15.3 (16.8) Combined ratio before catastrophe losses and prior years reserve development 85.4 % 85.8 % (0.4) Overview
Performance highlights for the personal lines segment include:
•Premiums - Personal lines earned premiums and net written premiums continued to grow during the first three months of 2022, including increased new business and renewal written premiums that included higher average pricing. Personal lines net written premiums from high net worth policies totaled approximately$176 million for the first three months of 2022, compared with$133 million for the same period of 2021. The table below analyzes the primary components of premiums. Agency renewal written premiums increased 10% for the first three months of 2022, reflecting rate increases in selected states and other factors such as changes in policy deductibles or mix of business. We estimate that premium rates for our personal auto line of business increased at average percentages in the low-single-digit range during the first three months of 2022. For our homeowner line of business, we estimate that premium rates for the first three months of 2022 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 13% for the first three months of 2022, compared with the same period of 2021. We believe underwriting and pricing discipline was maintained in recent quarters, and growth was supported by expanded use of enhanced pricing precision tools, including excess and surplus lines homeowner policies. 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 less than$1 million for the first three months of 2022, compared with the same period of 2021. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 40 -------------------------------------------------------------------------------- We continue working 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
2022 2021 % Change
Agency renewal written premiums $ 333 $ 302 10
Agency new business written premiums 52 46 13
Other written premiums (11) (10) (10)
Net written premiums 374 338 11
Unearned premium change 28 38 (26)
Earned premiums $ 402 $ 376 7
•Combined ratio - Our personal lines combined ratio for the first quarter of
2022 improved by 17.2 percentage points, compared with first-quarter 2021,
including a lower ratio for current accident year loss and loss expenses before
catastrophe losses and a decrease of 18.1 points in losses from catastrophes.
The ratio for current accident year loss and loss expenses before catastrophe
losses for personal lines improved in the first three months of 2022. That 55.0%
ratio was 2.3 percentage points lower, compared with the 57.3% accident year
2021 ratio measured as of March 31, 2021 , including an increase of
3.2 percentage points in the ratio for large losses of $1 million or more per
claim, discussed below.
Catastrophe losses and loss expenses accounted for 1.7 percentage points of the
combined ratio for the first three months of 2022, compared with 19.8 percentage
points for the same period a year ago. The 10-year annual average catastrophe
loss ratio for the personal lines segment through 2021 was 10.8 percentage
points, and the five-year annual average was 12.0 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 first
quarter of 2022 was favorable for personal lines overall by $34 million ,
compared with $20 million of favorable development for the first three months
of 2021. Our homeowner line of business was the primary contributor to the
personal lines net favorable reserve development for the first three months of
2022. The net favorable reserve development was primarily due to
lower-than-anticipated loss emergence on known claims. Reserve estimates are
inherently uncertain as described in our 2021 Annual Report on Form 10-K, Item
7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss
Expense Reserves, Page 52.
The personal lines underwriting expense ratio increased for the first quarter of
2022, compared with the same period a year ago, primarily due to an increase in
profit-sharing commissions for agencies and related expenses. The ratio also
included ongoing expense management efforts and higher earned premiums.
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Personal Lines Insurance Losses Incurred by Size
Three months ended March
(Dollars in millions, net of reinsurance)
31,
2022 2021 % Change
Current accident year losses greater than $5 million $ 7 $ - nm
Current accident year losses $1 million - $5 million 11 4 175
Large loss prior accident year reserve development 4 (1) nm
Total large losses incurred 22 3 nm
Losses incurred but not reported (14) 41 nm
Other losses excluding catastrophe losses 165 130 27
Catastrophe losses 6 74 (92)
Total losses incurred $ 179 $ 248 (28)
Ratios as a percent of earned premiums: Pt. Change
Current accident year losses greater than $5 million 1.7 % - % 1.7
Current accident year losses $1 million - $5 million 2.7 1.2 1.5
Large loss prior accident year reserve development 1.1 (0.3) 1.4
Total large loss ratio 5.5 0.9 4.6
Losses incurred but not reported (3.6) 11.0 (14.6)
Other losses excluding catastrophe losses 41.2 34.4 6.8
Catastrophe losses 1.4 19.6 (18.2)
Total loss ratio 44.5 % 65.9 % (21.4)
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 first quarter of 2022, the personal lines total large loss
ratio, net of reinsurance, was 4.6 percentage points higher than last year's
first quarter. The increase in personal lines large losses for the first three
months of 2022 occurred primarily for our homeowner line of business. We believe
results for the three-month period 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
Three months ended
(Dollars in millions) March 31,
2022 2021 % Change
Earned premiums $ 112 $ 89 26
Fee revenues 1 - nm
Total revenues 113 89 27
Loss and loss expenses from:
Current accident year before catastrophe losses 70 54 30
Current accident year catastrophe losses 1 1 0
Prior accident years before catastrophe losses (5) 4 nm
Prior accident years catastrophe losses - - 0
Loss and loss expenses 66 59 12
Underwriting expenses 31 22 41
Underwriting profit $ 16 $ 8 100
Ratios as a percent of earned premiums: Pt. Change
Current accident year before catastrophe losses 61.8 % 61.0 % 0.8
Current accident year catastrophe losses 1.5 1.3 0.2
Prior accident years before catastrophe losses (4.6) 4.7 (9.3)
Prior accident years catastrophe losses (0.4) (0.3) (0.1)
Loss and loss expenses 58.3 66.7 (8.4)
Underwriting expenses 27.6 25.3 2.3
Combined ratio 85.9 % 92.0 % (6.1)
Combined ratio 85.9 % 92.0 % (6.1)
Contribution from catastrophe losses and prior years
reserve development
(3.5) 5.7 (9.2) Combined ratio before catastrophe losses and prior years reserve development 89.4 % 86.3 % 3.1 Overview
Performance highlights for the excess and surplus lines segment include:
•Premiums - Excess and surplus lines net written premiums continued to grow during the first three months of 2022, compared with the same period a year ago, primarily due to an increase in agency renewal written premiums. Renewal written premiums rose 24% for the three months endedMarch 31, 2022 , compared with the same period of 2021, reflecting the opportunity to renew many accounts for the first time, as well as higher renewal pricing. For the first three months of 2022, excess and surplus lines policy renewals experienced estimated average price increases at percentages in the high-single-digit range. We measure average changes in excess and 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 24% for the first quarter of 2022 compared with the same period of 2021, 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. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 43 --------------------------------------------------------------------------------
Excess and Surplus Lines Insurance Premiums
(Dollars in millions) Three months ended
2022 2021 % Change
Agency renewal written premiums $ 94 $ 76 24
Agency new business written premiums 36 29 24
Other written premiums (6) (6) 0
Net written premiums 124 99 25
Unearned premium change (12) (10) (20)
Earned premiums $ 112 $ 89 26
•Combined ratio - The excess and surplus lines combined ratio improved by 6.1
percentage points for the first quarter of 2022, compared with the same period
of 2021, primarily due to favorable reserve development on prior accident years.
The IBNR portion of the total loss and loss expense ratio before catastrophe
losses was 20.8 percentage points lower for the first three months of 2022,
compared with the same period a year ago, while the paid portion was 10.0 points
lower and the case incurred portion was 12.3 points higher.
The ratio for current accident year loss and loss expenses before catastrophe
losses for excess and surplus lines increased in the first three months of 2022.
That 61.8% ratio was 0.8 percentage points higher, compared with the 61.0%
accident year 2021 ratio measured as of March 31, 2021 , including an increase of
2.4 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 a favorable 5.0% for the first three months of
2022, compared with unfavorable net reserve development of 4.4% for the first
three months of 2021. The $5 million of net favorable reserve development
recognized during the first three months of 2022 was primarily for accident
years prior to 2021. The favorable reserve development was due primarily to
lower-than-anticipated loss emergence on known claims. Reserve estimates are
inherently uncertain as described in our 2021 Annual Report on Form 10-K,
Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss
Expense Reserves, Page 52.
The excess and surplus lines underwriting expense ratio increased for the first
three months of 2022, compared with the same period of 2021, primarily due to an
increase in commissions for agencies and related expenses. The ratio also
included ongoing expense management efforts and higher earned premiums.
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Excess and Surplus Lines Insurance Losses Incurred by Size
Three months ended
(Dollars in millions, net of reinsurance)
2022 2021 % Change
Current accident year losses greater than $5 million $ - $ - 0
Current accident year losses $1 million - $5 million 4 1 300
Large loss prior accident year reserve development - (1) 100
Total large losses incurred 4 - nm
Losses incurred but not reported 12 22 (45)
Other losses excluding catastrophe losses 32 15 113
Catastrophe losses 1 1 0
Total losses incurred $ 49 $ 38 29
Ratios as a percent of earned premiums: Pt. Change
Current accident year losses greater than $5 million - % - % 0.0
Current accident year losses $1 million - $5 million 3.6 1.2 2.4
Large loss prior accident year reserve development 0.3 (1.7) 2.0
Total large loss ratio 3.9 (0.5) 4.4
Losses incurred but not reported 10.6 24.8 (14.2)
Other losses excluding catastrophe losses 27.4 17.8 9.6
Catastrophe losses 1.1 1.0 0.1
Total loss ratio 43.0 % 43.1 % (0.1)
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 first quarter of 2022, the excess and surplus
lines total ratio for large losses, net of reinsurance, was 4.4 percentage
points higher than last year's first quarter. We believe results for the
three-month period largely reflected normal fluctuations in loss patterns and
normal variability in large case reserves for claims above $1 million .
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LIFE INSURANCE RESULTS
Three months ended
(Dollars in millions) March 31,
2022 2021 % Change
Earned premiums $ 72 $ 69 4
Fee revenues 1 1 0
Total revenues 73 70 4
Contract holders' benefits incurred 83 80 4
Investment interest credited to contract holders (27) (26) (4)
Underwriting expenses incurred 19 18 6
Total benefits and expenses 75 72 4
Life insurance segment loss $ (2) $ (2) 0
Overview
The COVID-19 pandemic did not have a significant effect on our life insurance
segment earned premiums or expenses for the first three months of 2022. However,
the pandemic did contribute to a moderate increase in death claims in that time
period. It is possible we may continue to experience higher than projected
future death claims due to the pandemic.
Performance highlights for the life insurance segment include:
•Revenues - Revenues increased for the three months ended
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 1% to
at
Fixed annuity deposits received for the three months endedMarch 31, 2022 , were$8 million , compared with$17 million for the same period of 2021. 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 March 31,
2022 2021 % Change
Term life insurance $ 54 $ 51 6
Whole life insurance 11 11 0
Universal life and other 7 7 0
Net earned premiums $ 72 $ 69 4
•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 $2 million loss for our
life insurance segment was reported in the first three months of 2022 and 2021.
Favorable impacts from unlocking of interest rate actuarial assumptions in the
first three months of 2022 were mostly offset by less favorable mortality
experience compared to the same period of 2021, due in part to pandemic-related
death claims.
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 three months of 2022.
Life policy and investment contract reserves increased with continued growth in
net in-force life insurance policy face amounts partially offset by favorable
effects from the unlocking of interest rate actuarial assumptions. Mortality
results increased,
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compared with the same period of 2021, and were above our 2022 projections, due
in part to pandemic-related death claims.
Underwriting expenses for the first three months of 2022 increased compared to the same period a year ago, largely due to higher commission and general expense levels compared to the same period of 2021. 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$10 million for the three months endedMarch 31, 2022 , andMarch 31, 2021 . 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 6% for the first quarter of 2022, compared with the same period of 2021. Interest income increased by$5 million for the first quarter, 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$7 million for the three months endedMarch 31, 2022 . Investments Results Three months ended (Dollars in millions) March 31, 2022 2021 % Change Total investment income, net of expenses$ 185 $ 174 6 Investment interest credited to contract holders (27) (26) (4) Investment gains and losses, net (666) 504 nm Investments profit (loss), pretax$ (508) $ 652 nm We continue to consider the low interest rate environment that has prevailed in recent years as well as the potential for a continuation of the recent spike in both inflation and yields as we position our portfolio. As bonds in our generally laddered portfolio mature or are called over the near term, we will reinvest with a balanced approach, keeping in mind our long term strategy and pursuing attractive risk-adjusted after-tax yields. 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 March 31, 2022 % Yield redemptions Fixed-maturity pretax yield profile: Expected to mature during the remainder of 2022 3.69 % $ 554 Expected to mature during 2023 3.83 788 Expected to mature during 2024 4.31 1,001 Average yield and total expected maturities from the remainder of 2022 through 2024 4.00$ 2,343 Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 47
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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 three months
of 2022 was lower than the 4.02% average yield-to-amortized cost of the
fixed-maturity securities portfolio at the end of 2021. Our fixed-maturity
portfolio's average yield of 4.01% for the first three months of 2022, from the
investment income table below, was also lower than the 4.02% yield for the
year-end 2021 fixed-maturities portfolio.
Three
months ended
2022 2021
Average pretax yield-to-amortized cost on new
fixed-maturities:
Acquired taxable fixed-maturities 3.79 % 3.74 %
Acquired tax-exempt fixed-maturities 2.71 2.94
Average total fixed-maturities acquired 3.64 3.71
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 2021 Annual
Report on Form 10-K, Item 1, Investments Segment, Page 24, and Item 7,
Investments Outlook, Page 90. 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.
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.
Three months ended
(Dollars in millions) March 31,
2022 2021 % Change
Investment income:
Interest $ 123 $ 118 4
Dividends 65 58 12
Other 1 2 (50)
Less investment expenses 4 4 0
Investment income, pretax 185 174 6
Less income taxes 29 27 7
Total investment income, after-tax $ 156 $ 147 6
Investment returns:
Average invested assets plus cash and cash
equivalents $ 24,677 $ 21,776
Average yield pretax 3.00 % 3.20 %
Average yield after-tax 2.53 2.70
Effective tax rate 15.6 15.5
Fixed-maturity returns:
Average amortized cost $ 12,280 $ 11,395
Average yield pretax 4.01 % 4.14 %
Average yield after-tax 3.33 3.45
Effective tax rate 17.0 16.7
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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 2021 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 127.
The table below summarizes total investment gains and losses, before taxes.
(Dollars in millions) Three months ended
March 31,
2022 2021
Investment gains and losses:
Equity securities:
Investment gains and losses on securities sold, net $ 8 $ 4
Unrealized gains and losses on securities still held, net (683) 487
Subtotal (675) 491
Fixed maturities:
Gross realized gains 4 3
Gross realized losses (1) -
Subtotal 3 3
Other 6 10
Total investment gains and losses reported in net income (666) 504
Change in unrealized investment gains and losses:
Fixed maturities (746) (196) Total$ (1,412) $ 308 Of the 4,362 fixed-maturity securities in the portfolio, none were trading below 70% of amortized cost atMarch 31, 2022 . 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. Fixed-maturity securities written down to fair value due to an intention to be sold and changes in the allowance for credit losses were each less than$1 million for the first three months of 2022. We had no fixed-maturity securities written down to fair value due to an intention to be sold and no allowance for credit losses for the first three months of 2021. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 49
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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 three months of 2022 for our Other operations increased, compared with the same period of 2021, primarily due to earned premiums from Cincinnati Re and Cincinnati Global, with increases of$18 million and less than$1 million , respectively. Total expenses for Other increased for the first three months of 2022, primarily due to underwriting expenses from Cincinnati Re and Cincinnati Global. Other profit or loss in the table below represents profit or losses before income taxes. Other loss resulted primarily from interest expense from debt of the parent company. Three months ended (Dollars in millions) March 31, 2022 2021 % Change Interest and fees on loans and leases$ 1 $ 1 0 Earned premiums 142 124 15 Other revenues 1 1 0 Total revenues 144 126 14 Interest expense 13 13 0 Loss and loss expenses 89 88 1 Underwriting expenses 45 38 18 Operating expenses 4 4 0 Total expenses 151 143 6 Total other loss$ (7) $ (17) 59 TAXES We had$87 million of income tax benefit for the three months endedMarch 31, 2022 , compared with$148 million of income tax expense for the same period of 2021. The effective tax rate for the three months endedMarch 31, 2022 , was 24.2% compared with 19.3% for the same period 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. 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. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 50 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
AtMarch 31, 2022 , shareholders' equity was$12.092 billion , compared with$13.105 billion atDecember 31, 2021 . Total debt was$838 million atMarch 31, 2022 , down$5 million fromDecember 31, 2021 . AtMarch 31, 2022 , cash and cash equivalents totaled$987 million , compared with$1.139 billion atDecember 31, 2021 . The pandemic did not have a significant effect on our cash flows for the first three months of 2022. In addition to our historically positive operating cash flow to meet the needs of operations, we have the ability to slow investing activities or sell a portion of our high-quality, liquid investment portfolio 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$504 million to the parent company in the first three months of 2022, compared with$158 million for the same period of 2021. For full-year 2021, our lead insurance subsidiary paid dividends totaling$583 million to the parent company.State of Ohio regulatory requirements restrict the dividends our insurance subsidiary can pay. For full-year 2022, total dividends that our insurance subsidiary can pay to our parent company without regulatory approval are approximately$929 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 2021 Annual Report on Form 10-K, Item 1, Investments
Segment, Page 24.
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):
Three months ended
(Dollars in millions) March 31,
2022 2021 % Change
Premiums collected $ 1,714 $ 1,523 13
Loss and loss expenses paid (890) (705) (26)
Commissions and other underwriting expenses paid (711) (571) (25)
Cash flow from underwriting 113 247 (54)
Investment income received 128 121 6
Cash flow from operations $ 241 $ 368 (35)
Collected premiums for property casualty insurance rose $191 million during the
first three months of 2022, compared with the same period in 2021. Loss and loss
expenses paid for the 2022 period increased $185 million . Commissions and other
underwriting expenses paid increased $140 million .
Cincinnati Financial Corporation First-Quarter 2022 10-Q
Page 51
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We discuss our future obligations for claims payments and for underwriting
expenses in our 2021 Annual Report on Form 10-K, Item 7, Obligations, Page 96.
Capital Resources
AtMarch 31, 2022 , our debt-to-total-capital ratio was 6.5%, considerably below our 35% covenant threshold, with$789 million in long-term debt and$49 million in borrowing on our revolving short-term line of credit. AtMarch 31, 2022 ,$251 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 atMarch 31, 2022 , we do not anticipate a material increase in debt levels exceeding the available line of credit amount during 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 atMarch 31, 2022 , 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 three months of 2022. Our debt ratings are discussed in our 2021 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, Long-Term Debt, Page 95.
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, 2021 , in our 2021 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 96. There have been no material changes to our estimates of future contractual obligations since our 2021 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$499 million in the first three months of 2022. 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
months of 2022.
There were no contributions to our qualified pension plan during the first three
months of 2022.
Cincinnati Financial Corporation First-Quarter 2022 10-Q
Page 52
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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 2022 , the board of directors declared regular quarterly cash dividends of69 cents per share for an indicated annual rate of$2.76 per share. During the first three months of 2022, we used$99 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 2021 Annual Report on Form 10-K, Item 7, Property Casualty Loss and Loss Expense Obligations and Reserves, Page 97. Total gross reserves atMarch 31, 2022 , increased$58 million compared withDecember 31, 2021 . Case loss reserves decreased by$4 million , IBNR loss reserves increased by$45 million and loss expense reserves increased by$17 million . The total gross increase was primarily due to our commercial casualty line of business and also Cincinnati Re. Cincinnati Financial Corporation First-Quarter 2022 10-Q Page 53 --------------------------------------------------------------------------------
Property Casualty Gross Reserves
(Dollars in millions) Loss reserves
Case IBNR Loss expense Total gross Percent of
At March 31, 2022 reserves reserves reserves reserves total
Commercial lines insurance:
Commercial casualty $ 1,045 $ 791 $ 710 $ 2,546 34.9 %
Commercial property 348 52 68 468 6.4
Commercial auto 420 218 123 761 10.5
Workers' compensation 426 518 87 1,031 14.1
Other commercial 101 10 120 231 3.2
Subtotal 2,340 1,589 1,108 5,037 69.1
Personal lines insurance:
Personal auto 206 54 58 318 4.4
Homeowner 168 74 42 284 3.9
Other personal 82 88 5 175 2.4
Subtotal 456 216 105 777 10.7
Excess and surplus lines 249 198 163 610 8.4
Cincinnati Re 133 483 4 620 8.5
Cincinnati Global 149 92 2 243 3.3
Total $ 3,327 $ 2,578 $ 1,382 $ 7,287 100.0 %
At December 31, 2021
Commercial lines insurance:
Commercial casualty $ 1,059 $ 734 $ 704 $ 2,497 34.5 %
Commercial property 357 82 62 501 6.9
Commercial auto 419 220 124 763 10.6
Workers' compensation 442 503 85 1,030 14.3
Other commercial 91 9 116 216 3.0
Subtotal 2,368 1,548 1,091 5,007 69.3
Personal lines insurance:
Personal auto 211 53 60 324 4.5
Homeowner 168 102 44 314 4.3
Other personal 84 87 5 176 2.4
Subtotal 463 242 109 814 11.2
Excess and surplus lines 233 186 158 577 8.0
Cincinnati Re 117 460 5 582 8.1
Cincinnati Global 150 97 2 249 3.4
Total $ 3,331 $ 2,533 $ 1,365 $ 7,229 100.0 %
LIFE POLICY AND INVESTMENT CONTRACT RESERVES
Gross life policy and investment contract reserves were
continued growth in life insurance policies in force. We discuss our life
insurance reserving practices in our 2021 Annual Report on Form 10-K, Item 7,
Life Insurance Policyholder Obligations and Reserves, Page 103.
Cincinnati Financial Corporation First-Quarter 2022 10-Q
Page 54
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OTHER MATTERS
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are discussed in our 2021 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 127, 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 2021 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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