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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, war or political unrest, 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
(Dollars in millions, except per
share data) Three months ended June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Earned premiums $ 1,773 $ 1,593 11 $ 3,463 $ 3,137 10
Investment income, net of expenses
(pretax) 195 175 11 380 349 9
Investment gains and losses, net
(pretax) (1,154) 520 nm (1,820) 1,024 nm
Total revenues 820 2,295 (64) 2,035 4,522 (55)
Net income (loss) (808) 703 nm (1,081) 1,323 nm
Comprehensive income (loss) (1,290) 809 nm (2,152) 1,285
nm
Net income (loss) per share-diluted (5.06) 4.31 nm (6.76) 8.13
nm
Cash dividends declared per share 0.69 0.63 10 1.38 1.26 10 Diluted weighted average shares outstanding 159.6 162.9 (2) 160.0 162.7 (2) Total revenues decreased$1.475 billion for the second quarter of 2022, compared with the second quarter of 2021, as a reduction in net investment gains offset increases in earned premiums and investment income. For the first six months of 2022, compared with the same period of 2021, total revenues decreased$2.487 billion , as higher earned premiums and investment income were offset by a reduction in net investment gains. 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 second quarter of 2022, compared with second-quarter 2021 net income, was a change of$1.511 billion , including a decrease of$1.323 billion in after-tax net investment gains and losses and a decrease of$216 million in after-tax property casualty underwriting income that offset an increase of$16 million in after-tax investment income. Catastrophe losses for the second quarter of 2022, mostly weather related, were$119 million higher after taxes and unfavorably affected both net income and property casualty underwriting income. Life insurance segment results on a pretax basis increased by$15 million compared with the second quarter of 2021. For the first six months of 2022, net income decreased$2.404 billion , compared with the first six months of 2021, including decreases of$2.247 billion in after-tax investment gains and losses and$190 million in after-tax property casualty underwriting income that offset an increase of$25 million in after-tax investment income. The property casualty underwriting income decrease included an unfavorable$21 million after-tax effect from higher catastrophe losses. Life insurance segment results increased by$15 million on a pretax basis. The decrease in property casualty underwriting income for both 2022 periods also included higher insured loss experience before catastrophe effects, partly from elevated paid losses reflecting economic or other forms of inflation. Various pandemic effects are also increasing our uncertainty regarding ultimate losses. We believe the past two years distorted paid loss cost trends for reasons such as slowed activity for many businesses, reduced driving and closed courts that delayed progress on some litigated insurance claims. Until longer-term paid loss cost trends become more clear, we intend to remain prudent in reserving for estimated ultimate losses. As a result, first-half 2022 incurred losses for several lines of business were higher than in recent periods and are discussed in Financial Results by property casualty insurance segment. During the first six months of 2022, SARS-CoV-2, also known as COVID-19 and recognized as a pandemic by theWorld 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 six months of 2022 and there were no material changes to our estimates for incurred losses and expenses related to the pandemic. Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 31 -------------------------------------------------------------------------------- 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 otherU.S. publicly traded companies. InJanuary 2022 , the board of directors increased the regular quarterly dividend to69 cents per share, setting the stage for our 62nd consecutive year of increasing cash dividends. During the first six 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.
Balance Sheet Data and Performance Measures
(Dollars in millions, except share data) At June 30, At December 31,
2022 2021
Total investments $ 21,834 $ 24,666
Total assets 29,192 31,387
Short-term debt 44 54
Long-term debt 789 789
Shareholders' equity 10,553 13,105
Book value per share 66.30 81.72
Debt-to-total-capital ratio 7.3 %
6.0 %
Total assets atJune 30, 2022 , decreased 7% compared with year-end 2021, and included an 11% decrease in total investments that reflected net purchases that were offset by lower fair values for many securities in our portfolio. Shareholders' equity decreased 19% and book value per share also decreased 19% during the first six 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 17.2% for the first six months of 2022, and was less than the same period in 2021 primarily due to a reduction in overall net gains from our investment portfolio. The$15.42 decrease in book value per share during the first six months of 2022 contributed negative 18.9 percentage points to the value creation ratio, while dividends declared at$1.38 per share contributed positive 1.7 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 June 30, Six months ended June 30, 2022 2021 2022 2021 Value creation ratio major components: Net income before investment gains 0.8 % 2.6 % 2.7 % 4.8 % Change in fixed-maturity securities, realized and unrealized gains (4.0) 1.0 (8.2) (0.4) Change in equity securities, investment gains (7.7) 3.5 (11.2) 7.2 Other (0.3) 0.2 (0.5) 0.0 Value creation ratio (11.2) % 7.3 % (17.2) % 11.6 %
Cincinnati Financial Corporation Second-Quarter 2022 10-Q
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(Dollars are per share) Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Value creation ratio:
End of period book value* $ 66.30 $ 73.57 $ 66.30 $ 73.57
Less beginning of period book value 75.43 69.16 81.72 67.04
Change in book value (9.13) 4.41 (15.42) 6.53
Dividend declared to shareholders 0.69 0.63 1.38 1.26
Total value creation $ (8.44) $
5.04
Value creation ratio from change in book value** (12.1) % 6.4 % (18.9) % 9.7 % Value creation ratio from dividends declared to shareholders*** 0.9 0.9 1.7 1.9 Value creation ratio (11.2) % 7.3 % (17.2) % 11.6 %
* 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. AtJune 30, 2022 , we actively marketed through 1,948 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 six months of 2022, our consolidated property casualty net written premium year-over-year growth was 13%. 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 six months of 2022, our GAAP combined ratio was 96.7%, including 8.6 percentage points of current accident year catastrophe losses partially offset by 3.0 percentage points of favorable loss reserve development on prior accident years. Our statutory combined ratio was 95.3% for the first six 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 six months of 2022, pretax investment income was$380 million , up 9% 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 Second-Quarter 2022 10-Q Page 33 --------------------------------------------------------------------------------
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. AtJune 30, 2022 , we held$4.450 billion of our cash and cash equivalents and invested assets at the parent-company level, of which$3.922 billion , or 88.1%, was invested in common stocks, and$392 million , or 8.8%, was cash or cash equivalents. Our debt-to-total-capital ratio was 7.3% atJune 30, 2022 . Another important indicator of financial strength is our ratio of property casualty net written premiums to statutory surplus, which was 1.1-to-1 for the 12 months endedJune 30, 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). (Dollars in millions) Three months ended June 30, Six months ended June 30, 2022 2021 % Change 2022 2021 % Change Earned premiums $ 1,697$ 1,514 12 $ 3,315$ 2,989 11 Fee revenues 2 3 (33) 5 5 0 Total revenues 1,699 1,517 12 3,320 2,994 11 Loss and loss expenses from: Current accident year before catastrophe losses 1,064 861 24 2,011 1,711 18 Current accident year catastrophe losses 235 88 167 285 271 5 Prior accident years before catastrophe losses (34) (90) 62 (54) (170) 68 Prior accident years catastrophe losses (25) (29) 14 (46) (59) 22 Loss and loss expenses 1,240 830 49 2,196 1,753 25 Underwriting expenses 511 466 10 1,011 887 14 Underwriting profit (loss) $ (52)$ 221 nm $ 113$ 354 (68) Ratios as a percent of earned premiums: Pt. Change Pt.
Change
Current accident year before catastrophe losses 62.7 % 56.8 % 5.9 60.6 % 57.2 % 3.4 Current accident year catastrophe losses 13.8 5.8 8.0 8.6 9.1 (0.5) Prior accident years before catastrophe losses (2.0) (5.9) 3.9 (1.6) (5.7) 4.1 Prior accident years catastrophe losses (1.4) (1.9) 0.5 (1.4) (2.0) 0.6 Loss and loss expenses 73.1 54.8 18.3 66.2 58.6 7.6 Underwriting expenses 30.1 30.7 (0.6) 30.5 29.7 0.8 Combined ratio 103.2 % 85.5 % 17.7 96.7 % 88.3 % 8.4 Combined ratio 103.2 % 85.5 % 17.7 96.7 % 88.3 % 8.4 Contribution from catastrophe losses and prior years reserve development 10.4 (2.0) 12.4 5.6 1.4 4.2 Combined ratio before catastrophe losses and prior years reserve development 92.8 % 87.5 % 5.3 91.1 % 86.9 % 4.2 Our consolidated property casualty insurance operations generated an underwriting loss of$52 million for the second quarter of 2022 and an underwriting profit of$113 million for the first six months of 2022. The second-quarter change of$273 million from an underwriting profit for the same period a year ago included an unfavorable increase of$151 million in losses from catastrophes, mostly caused by severe weather. The six-month underwriting profit decrease of$241 million , compared with the first six months of 2021, included an unfavorable increase of$27 million in losses from catastrophes. Both 2022 periods also experienced higher current accident year loss and loss expenses before catastrophe losses and lower amounts of favorable reserve development on prior accident years. Elevated inflation was a driver of higher losses and loss expenses as costs have increased significantly to repair damaged autos or other property that we insure. In addition to inflation affecting historic loss patterns, we believe reduced driving during the pandemic resulted in a relatively low level of loss activity in 2021, distorting paid loss cost trends for autos. We also experienced higher losses for liability coverages for some of our lines of business, particularly for commercial umbrella insurance. Due to increased uncertainty regarding ultimate losses, we intend to remain prudent in reserving for estimated ultimate losses until longer-term loss cost trends become more clear. The higher loss experience is discussed in Financial Results by property casualty insurance segment. 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. Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 35 --------------------------------------------------------------------------------
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 second quarter of 2022 rose by 17.7 percentage points, compared with the same period of 2021, including 8.5 points from higher catastrophe losses and loss expenses. For the first six months of 2022, compared with the 2021 six-month period, our combined ratio rose by 8.4 percentage points, including an increase of 0.1 point from 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. 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 3.0 percentage points in the first six months of 2022, compared with 7.7 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 six months of 2022. That 60.6% ratio was 3.4 percentage points higher, compared with the 57.2% accident year 2021 ratio measured as ofJune 30, 2021 , including an increase of 2.4 points in the ratio for large losses of$1 million or more per claim, discussed below. The underwriting expense ratio decreased for the second quarter and increased for the first six months of 2022, compared with the same periods a year ago. The second-quarter 2022 decrease was primarily due to a decrease in profit-sharing commissions for agencies and related expenses, while the six-month increase was primarily due to an increase in commissions for agencies. The ratios also included ongoing expense management efforts and higher earned premiums.
Consolidated Property Casualty Insurance Premiums
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Agency renewal written premiums $ 1,482 $ 1,333 11 $ 2,879 $ 2,609 10
Agency new business written
premiums 286 235 22 530 455 16
Other written premiums 196 146 34 454 343 32
Net written premiums 1,964 1,714 15 3,863 3,407 13
Unearned premium change (267) (200) (34) (548) (418) (31)
Earned premiums $ 1,697 $ 1,514 12 $ 3,315 $ 2,989 11
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 and six months
ended June 30, 2022 , grew $250 million and $456 million compared with the same
periods 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.
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Consolidated property casualty agency new business written premiums increased by
$51 million and $75 million for the second quarter and first six months of 2022,
compared with the same periods of 2021. New agency appointments during 2022 and
2021 produced a $25 million increase in standard lines new business for the
first six 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 $42 million and $100 million for the three months and six months
ended June 30, 2022 , compared with the same periods of 2021, to $178 million and
$432 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 $22 million and $32 million , for the three and six months
ended June 30, 2022 , compared with the same periods of 2021, to $69 million and
$120 million , respectively.
Other written premiums also include premiums ceded to reinsurers as part of our
reinsurance ceded program. An increase in ceded premiums reduced net written
premiums by $8 million and $15 million for the second quarter and first six
months of 2022, compared with the same periods 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 12.4 and 7.2 percentage points to the
combined ratio in the second quarter and first six months of 2022, compared with
3.9 and 7.1 percentage points in the same period of 2021.
EffectiveJune 1, 2022 , we restructured our reinsurance program forCincinnati Re only, providing retrocession coverages with various triggers and unique features. That program included property catastrophe excess of loss coverage with a total available aggregate limit of$30 million in excess of$100 million per loss. Coverage for Cincinnati Re only with a total available aggregate limit of$48 million in excess of$80 million per loss expired during the second quarter of 2022. Effective inMay 2022 , to provide more capacity to retain risks, we added a quota share reinsurance arrangement for our personal lines risks inCalifornia that we insure through excess and surplus lines policies. Approximately 26% of the risk is reinsured through ceded premiums. Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 37 -------------------------------------------------------------------------------- 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 endedJune 30 , Six months endedJune 30 , Comm. Pers. E&S Comm. Pers. E&S Dates Region lines lines lines Other Total lines lines lines Other Total 2022 Ongoing International (Ukraine ) $ - $ - $ -$ 6 $ 6 $ - $ - $ -$ 11 $ 11 Mar. 29 - Apr.1 Midwest, Northeast, South 6 6 - - 12 6 6 - - 12Apr. 10-14 Midwest, West, South 17 10 1 - 28 17 10 1 - 28Apr. 15-19 Northeast, South 17 3 - - 20 17 3 - - 20May 1-3 Midwest, West, South 8 8 - - 16 8 8 - - 16May 9-10 Midwest 19 4 - - 23 19 4 - - 23May 11-12 Midwest, South 13 6 - - 19 13 6 - - 19May 19-22 Midwest, Northeast, South 5 12 - - 17 5 12 - - 17Jun. 4-8 Midwest, West, South 13 4 - - 17 13 4 - - 17Jun. 11-17 Midwest, Northeast, South 17 19 - - 36 17 19 - - 36 All other 2022 catastrophes 20 18 1 2 41 36 46 2 2 86 Development on 2021 and prior catastrophes (10) (12) - (3) (25) (13) (33) - - (46) Calendar year incurred total $ 125$ 78 $ 2 $ 5 $ 210 $ 138 $ 85 $ 3 $ 13 $ 239 2021Feb. 12-15 South, West $ - $ - $ -$ (3) $ (3) $ 10 $ 5 $ -$ 47 $ 62 Feb. 16-20 Midwest, Northeast, South 1 (4) - 10 7 24 33 1 11 69Mar. 24-26 Midwest, Northeast, South 5 - - - 5 13 19 - - 32Mar. 27-29 Midwest, Northeast, South (1) 1 - - - 3 9 - - 12May 3-4 South 11 4 - - 15 11 4 - - 15Jun. 17-20 Midwest 6 14 - - 20 6 14 - - 20 All other 2021 catastrophes 17 26 - 1 44 26 35 - - 61 Development on 2020 and prior catastrophes (10) (1) - (18) (29) (27) (4) - (28) (59) Calendar year incurred total $ 29$ 40 $ -$ (10) $ 59 $ 66 $ 115 $ 1 $ 30 $ 212 Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 38
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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 June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Current accident year losses greater
than $5 million $ 38 $ 38 0 $ 61 $ 43 42
Current accident year losses $1
million - $5 million 77 51 51 159 82 94
Large loss prior accident year
reserve development 38 13 192 63 37 70
Total large losses incurred 153 102 50 283 162 75
Losses incurred but not reported 74 (37) nm 110 65 69
Other losses excluding catastrophe
losses 648 577 12 1,240 1,028 21
Catastrophe losses 208 56 271 232 206 13
Total losses incurred $ 1,083 $ 698 55 $ 1,865 $ 1,461 28
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year losses greater
than $5 million 2.2 % 2.5 % (0.3) 1.8 % 1.4 % 0.4
Current accident year losses $1
million - $5 million 4.6 3.4 1.2 4.8 2.8 2.0
Large loss prior accident year
reserve development 2.2 0.9 1.3 1.9 1.2 0.7
Total large loss ratio 9.0 6.8 2.2 8.5 5.4 3.1
Losses incurred but not reported 4.4 (2.4) 6.8 3.3 2.2 1.1
Other losses excluding catastrophe
losses 38.1 38.0 0.1 37.4 34.4 3.0
Catastrophe losses 12.3 3.7 8.6 7.0 6.9 0.1
Total loss ratio 63.8 % 46.1 % 17.7 56.2 % 48.9 % 7.3
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 second-quarter 2022 property casualty total large losses incurred
of $153 million , net of reinsurance, were higher than the $116 million quarterly
average during full-year 2021 and the $102 million experienced for the
second quarter of 2021. The ratio for these large losses was 2.2 percentage
points higher compared with last year's second quarter. The second-quarter 2022
amount of total large losses incurred helped contribute to the increase in the
six-month 2022 total large loss ratio, compared with 2021, in addition to a
first-quarter 2022 ratio that was 3.9 points higher than the first quarter of
2021. We believe results for the three- and six-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
Cincinnati Financial Corporation Second-Quarter 2022 10-Q
Page 39
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COMMERCIAL LINES INSURANCE RESULTS
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Earned premiums $ 994 $ 911 9 $ 1,956 $ 1,797 9
Fee revenues 1 1 0 2 2 0
Total revenues 995 912 9 1,958 1,799 9
Loss and loss expenses from:
Current accident year before
catastrophe losses 644 527 22 1,232 1,059 16
Current accident year catastrophe
losses 135 39 246 151 93 62
Prior accident years before
catastrophe losses (19) (76) 75 (34) (142) 76
Prior accident years catastrophe
losses (10) (10) 0 (13) (27) 52
Loss and loss expenses 750 480 56 1,336 983 36
Underwriting expenses 307 287 7 608 541 12
Underwriting profit (loss) $ (62) $ 145 nm $ 14 $ 275 (95)
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year before
catastrophe losses 64.8 % 57.9 % 6.9 63.0 % 58.9 % 4.1
Current accident year catastrophe
losses 13.6 4.3 9.3 7.7 5.2 2.5
Prior accident years before
catastrophe losses (1.9) (8.3) 6.4 (1.8) (7.9) 6.1
Prior accident years catastrophe
losses (1.0) (1.1) 0.1 (0.6) (1.5) 0.9
Loss and loss expenses 75.5 52.8 22.7 68.3 54.7 13.6
Underwriting expenses 30.8 31.4 (0.6) 31.1 30.1 1.0
Combined ratio 106.3 % 84.2 % 22.1 99.4 % 84.8 % 14.6
Combined ratio 106.3 % 84.2 % 22.1 99.4 % 84.8 % 14.6
Contribution from catastrophe losses
and
prior years reserve development 10.7 (5.1) 15.8 5.3 (4.2)
9.5
Combined ratio before catastrophe losses and prior years reserve development 95.6 % 89.3 % 6.3 94.1 % 89.0 % 5.1 Overview
Performance highlights for the commercial lines segment include:
•Premiums - Earned premiums and net written premiums for the commercial lines segment grew during the three and six months endedJune 30, 2022 , compared with the same periods a year ago, primarily due to renewal written premium growth that continued to include higher average pricing and a higher level of insured exposures. 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 10% for the second quarter and 9% for the first six months of 2022, compared with the same periods of 2021, including price increases. During the second 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. Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 40 -------------------------------------------------------------------------------- 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 second quarter of 2022, we estimate that our average percentage price increases were in the mid-single-digit range for commercial property, commercial auto and commercial casualty. The estimated average percentage price change for workers' compensation was a decrease in the mid-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 six months of 2022 contributed$45 million to net written premiums, compared with$18 million for the same period of 2021. New business written premiums for commercial lines increased$19 million and$30 million during the second quarter and first six months of 2022, compared with the same periods 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 reduced net written premiums by$3 million and$9 million for the second quarter and first six months of 2022, compared with the same periods of 2021. Commercial Lines Insurance Premiums (Dollars in millions) Three months ended June 30, Six months ended June 30, 2022 2021 % Change 2022 2021 % Change Agency renewal written premiums$ 934 $ 852 10$ 1,904 $ 1,750 9 Agency new business written premiums 165 146 13 321 291 10 Other written premiums (27) (21) (29) (57) (45) (27) Net written premiums 1,072 977 10 2,168 1,996 9 Unearned premium change (78) (66) (18) (212) (199) (7) Earned premiums$ 994 $ 911 9$ 1,956 $ 1,797 9 •Combined ratio - The commercial lines combined ratio for the second quarter of 2022 increased by 22.1 percentage points, compared with the second quarter of 2021, including an increase of 9.4 points in losses from catastrophes. The second-quarter combined ratio also increased 6.9 points from current accident year loss and loss expenses before catastrophe losses, including 5.4 points from commercial umbrella coverages discussed below. For the first six months of 2022, the combined ratio increased by 14.6 percentage points, compared with the same period a year ago, including an increase of 3.4 points in losses from catastrophes and an increase of 4.1 points from current accident year loss and loss expenses before catastrophe losses, including 3.4 points from commercial umbrella. Underwriting results also included a lower level of favorable reserve development on prior accident years. Those current accident year ratios were measured as ofJune 30 of the respective years and included a second-quarter 2022 decrease of 0.7 percentage points and a six-month increase of 2.2 points in the ratio for large losses of$1 million or more per claim, discussed below. When estimating the ultimate cost of total loss and loss expenses, we consider many factors, including trends for inflation, historical paid and reported losses, large loss activity and other data or information for the industry or our company. Elevated inflation was a driver of higher losses and loss expenses as costs have increased significantly to repair damaged business property or autos that we insure. In addition to inflation causing deviations from historical loss patterns, we believe reduced driving during the pandemic resulted in a relatively low level of loss activity in 2021, distorting paid loss cost trends for autos. Due to increased uncertainty regarding ultimate losses, we intend to remain prudent in reserving for estimated ultimate losses until longer-term loss cost trends become more clear. Commercial umbrella coverages, part of our commercial casualty line of business that help protect businesses against liability from occurrences such as accidents or injuries, contributed significantly to the increase in 2022 ratios for losses and expenses. For the first six months of 2022, incurred losses and loss expenses for Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 41 -------------------------------------------------------------------------------- commercial umbrella coverages of$198 million increased$114 million or 137%, compared with the same period of 2021, in part due to paid losses of$112 million increasing$45 million or 68% while earned premiums rose 10%. Commercial umbrella paid loss experience is inherently variable. For example, paid losses rose 80% in 2019 while decreasing by 35% in both 2018 and 2020. Commercial umbrella net earned premiums were$243 million for the first six months of 2022 and represented approximately 35% of our commercial casualty premiums for the first half of both 2022 and 2021. The profile of coverage limits for policies in force at the beginning of second-quarter 2022 included 43% with$1 million of coverage per policy, 91% with$5 million or less and 98% with less than$10 million of coverage. Our commercial umbrella insurance coverages have a strong record of profitability for us, including an estimated combined ratio below 80% in each of the past five years. Catastrophe losses and loss expenses accounted for 12.6 and 7.1 percentage points of the combined ratio for the second quarter and first six months of 2022, compared with 3.2 and 3.7 percentage points for the same periods 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 second quarter and first six months of 2022 was favorable for commercial lines overall by$29 million and$47 million , compared with$86 million and$169 million for the same periods in 2021. For the first six months of 2022, our workers' compensation and commercial property lines of business were the main contributors to the commercial lines net favorable reserve development on prior accident years, while our commercial casualty line of business included net unfavorable development of$25 million from commercial umbrella coverages. The net favorable reserve development recognized during the first six 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 decreased for the second quarter and increased for the first six months of 2022, compared with the same periods a year ago. The second-quarter 2022 decrease was primarily due to a decrease in profit-sharing commissions for agencies and related expenses, while the six-month increase was primarily due to an increase in commissions for agencies. The ratios also included ongoing expense management efforts and higher earned premiums.
Commercial Lines Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance) Three months ended June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Current accident year losses greater
than $5 million $ 15 $ 38 (61) $ 31 $ 43
(28)
Current accident year losses$1 million -$5 million 53 29 83 120 55 118 Large loss prior accident year reserve development 36 14 157 57 40 43 Total large losses incurred 104 81 28 208 138 51 Losses incurred but not reported 61 (34) nm 99 5
nm
Other losses excluding catastrophe losses 363 326 11 681 587 16 Catastrophe losses 124 27 359 135 62 118 Total losses incurred$ 652 $ 400 63$ 1,123 $ 792 42 Ratios as a percent of earned premiums: Pt. Change Pt. Change Current accident year losses greater than$5 million 1.4 % 4.2 % (2.8) 1.6 % 2.4 %
(0.8)
Current accident year losses$1 million -$5 million 5.3 3.2 2.1 6.1 3.1 3.0 Large loss prior accident year reserve development 3.7 1.4 2.3 2.9 2.2 0.7 Total large loss ratio 10.4 8.8 1.6 10.6 7.7 2.9 Losses incurred but not reported 6.1 (3.6) 9.7 5.1 0.3 4.8 Other losses excluding catastrophe losses 36.6 35.7 0.9 34.8 32.6 2.2 Catastrophe losses 12.5 3.0 9.5 6.9 3.5 3.4 Total loss ratio 65.6 % 43.9 % 21.7 57.4 % 44.1 % 13.3 Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 42 -------------------------------------------------------------------------------- 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 second-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$81 million of total large losses incurred for the second quarter of 2021. The increase in commercial lines large losses for the first six months of 2022 was primarily due to our commercial casualty and commercial property lines of business. The second-quarter 2022 ratio for commercial lines total large losses was 1.6 percentage points higher than last year's second-quarter ratio. The second-quarter 2022 amount of total large losses incurred helped contribute to the increase in the six-month 2022 total large loss ratio, compared with 2021, in addition to a first-quarter 2022 ratio that was 4.2 points higher than the first quarter of 2021. We believe results for the three- and six-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above$1 million . Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 43 --------------------------------------------------------------------------------
PERSONAL LINES INSURANCE RESULTS
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Earned premiums $ 413 $ 382 8 $ 815 $ 758 8
Fee revenues 1 1 0 2 2 0
Total revenues 414 383 8 817 760 8
Loss and loss expenses from:
Current accident year before
catastrophe losses 263 212 24 484 427 13
Current accident year catastrophe
losses 90 41 120 118 119 (1)
Prior accident years before
catastrophe losses (2) (11) 82 (15) (28) 46
Prior accident years catastrophe
losses (12) (1) nm (33) (4) nm
Loss and loss expenses 339 241 41 554 514 8
Underwriting expenses 124 113 10 247 220 12
Underwriting profit (loss) $ (49) $ 29 nm $ 16 $ 26 (38)
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year before
catastrophe losses 63.5 % 55.3 % 8.2 59.3 % 56.3 % 3.0
Current accident year catastrophe
losses 21.9 10.9 11.0 14.5 15.7 (1.2)
Prior accident years before
catastrophe losses (0.5) (2.9) 2.4 (1.8) (3.7) 1.9
Prior accident years catastrophe
losses (2.8) (0.3) (2.5) (4.0) (0.5) (3.5)
Loss and loss expenses 82.1 63.0 19.1 68.0 67.8 0.2
Underwriting expenses 30.0 29.7 0.3 30.2 29.0 1.2
Combined ratio 112.1 % 92.7 % 19.4 98.2 % 96.8 % 1.4
Combined ratio 112.1 % 92.7 % 19.4 98.2 % 96.8 % 1.4
Contribution from catastrophe losses
and
prior years reserve development 18.6 7.7 10.9 8.7 11.5
(2.8)
Combined ratio before catastrophe losses and prior years reserve development 93.5 % 85.0 % 8.5 89.5 % 85.3 % 4.2 Overview
Performance highlights for the personal lines segment include:
•Premiums - Personal lines earned premiums and net written premiums continued to grow during the second quarter and first six 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$259 million and$435 million for the second quarter and first six months of 2022, compared with$177 million and$310 million for the same periods of 2021. The table below analyzes the primary components of premiums. Agency renewal written premiums increased 10% for both the second quarter and first six months of 2022, reflecting rate increases in selected states, a higher level of insured exposures 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 six months of 2022. We plan to increase rates more aggressively in future quarters. For our homeowner line of business, we estimate that premium rates for the first six 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$35 million or 66% for the second quarter of 2022 and$41 million , including$38 million from high net worth policies, for the first six months, compared with the same periods of 2021. Approximately$12 million of the second-quarter 2022 increase was from excess and surplus lines homeowner policies and$21 million was from other high net worth policies. We believe underwriting and Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 44 --------------------------------------------------------------------------------
pricing discipline were maintained in recent quarters, and growth was also
supported by expanded use of enhanced pricing precision tools.
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our personal lines insurance segment, an increase in 2022 ceded premiums reduced net written premiums by$4 million for both the second quarter and first six months, compared with the same periods of 2021. Personal Lines Insurance Premiums (Dollars in millions) Three months ended June 30, Six months ended June 30, 2022 2021 % Change 2022 2021 % Change Agency renewal written premiums$ 438 $ 397 10 $ 771$ 699 10 Agency new business written premiums 88 53 66 140 99 41 Other written premiums (16) (11) (45) (27) (21) (29) Net written premiums 510 439 16 884 777 14 Unearned premium change (97) (57) (70) (69) (19) (263) Earned premiums$ 413 $ 382 8 $ 815$ 758 8 •Combined ratio - Our personal lines combined ratio for the second quarter of 2022 increased by 19.4 percentage points, compared with second-quarter 2022, including an increase of 8.5 points in losses from catastrophes and an increase of 8.2 points from current accident year loss and loss expenses before catastrophe losses. For the first six months of 2022, the combined ratio increased by 1.4 percentage points, compared with the same period a year ago, including a decrease of 4.7 points in losses from catastrophes and an increase of 3.0 points from current accident year loss and loss expenses before catastrophe losses, with our personal auto and homeowner lines of business each representing approximately 1 point. Those current accident year ratios were measured as ofJune 30 of the respective years and included a second-quarter 2022 increase of 5.3 percentage points and a six-month increase of 4.4 points in the ratio for large losses of$1 million or more per claim, discussed below. When estimating the ultimate cost of total loss and loss expenses, we consider many factors, including trends in inflation, historical paid and reported losses, large loss activity and other data or information for the industry or our company. Elevated inflation was a driver of higher losses and loss expenses as costs have increased significantly to repair damaged autos or homes that we insure. In addition to inflation causing deviations from historical loss patterns, we believe reduced driving during the pandemic resulted in a relatively low level of loss activity in 2021, distorting paid loss cost trends for autos. Due to increased uncertainty regarding ultimate losses, we intend to remain prudent in reserving for estimated ultimate losses until longer-term loss cost trends become more clear. For example, for the first six months of 2022, personal auto incurred loss and loss expenses before catastrophe losses increased$48 million or 27%, compared with the same period of 2021, in part due to paid losses increasing$38 million or 22% while earned premiums rose 1%. Catastrophe losses and loss expenses accounted for 19.1 and 10.5 percentage points of the combined ratio for the second quarter and first six months of 2022, compared with 10.6 and 15.2 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 second quarter and first six months of 2022 was favorable for personal lines overall by$14 million and$48 million , compared with$12 million and$32 million of favorable development for the same periods of 2021. Our homeowner line of business was the primary contributor to the personal lines net favorable reserve development for the first six 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. Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 45 --------------------------------------------------------------------------------
The personal lines underwriting expense ratio increased for the second quarter
and first six months of 2022, compared with the same periods a year ago,
primarily due to an increase in commissions for agencies. The ratios also
included ongoing expense management efforts and higher earned premiums.
Personal Lines Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance) Three months ended June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Current accident year losses greater
than $5 million $ 23 $ - nm $ 30 $ -
nm
Current accident year losses$1 million -$5 million 15 15 0 26 19
37
Large loss prior accident year reserve development 1 (2) nm 5 (3) nm Total large losses incurred 39 13 200 61 16 281 Losses incurred but not reported 12 (4) nm (2) 37
nm
Other losses excluding catastrophe losses 176 158 11 341 288 18 Catastrophe losses 78 39 100 84 113 (26) Total losses incurred$ 305 $ 206 48$ 484 $ 454 7 Ratios as a percent of earned premiums: Pt. Change Pt. Change Current accident year losses greater than$5 million 5.7 % - % 5.7 3.7 % - %
3.7
Current accident year losses$1 million -$5 million 3.6 4.0 (0.4) 3.2 2.5
0.7
Large loss prior accident year reserve development 0.1 (0.5) 0.6 0.6 (0.3) 0.9 Total large loss ratio 9.4 3.5 5.9 7.5 2.2 5.3 Losses incurred but not reported 3.1 (1.1) 4.2 (0.2) 4.9
(5.1)
Other losses excluding catastrophe losses 42.4 41.4 1.0 41.8 37.9 3.9 Catastrophe losses 18.8 10.3 8.5 10.2 14.9 (4.7) Total loss ratio 73.7 % 54.1 % 19.6 59.3 % 59.9 % (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 second quarter of 2022, the personal lines total large loss ratio, net of reinsurance, was 5.9 percentage points higher than last year's second quarter. The increase in personal lines large losses for the first six months of 2022 occurred primarily for our homeowner line of business and for umbrella coverage in our other personal line of business. The second-quarter 2022 amount of total large losses incurred helped contribute to the increase in the six-month 2022 total large loss ratio, compared with 2021, in addition to a first-quarter 2022 ratio that was 4.6 points higher than the first quarter of 2021. We believe results for the three- and six-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above$1 million . Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 46 --------------------------------------------------------------------------------
EXCESS AND SURPLUS LINES INSURANCE RESULTS
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Earned premiums $ 124 $ 95 31 $ 236 $ 184 28
Fee revenues - 1 (100) 1 1 0
Total revenues 124 96 29 237 185 28
Loss and loss expenses from:
Current accident year before
catastrophe losses 73 59 24 143 113 27
Current accident year catastrophe
losses 2 - nm 3 1 200
Prior accident years before
catastrophe losses (1) (1) 0 (6) 3 nm
Prior accident years catastrophe
losses - - 0 - - 0
Loss and loss expenses 74 58 28 140 117 20
Underwriting expenses 31 28 11 62 50 24
Underwriting profit $ 19 $ 10 90 $ 35 $ 18 94
Ratios as a percent of earned
premiums: Pt. Change Pt.
Change
Current accident year before catastrophe losses 59.5 % 62.0 % (2.5) 60.6 % 61.5 %
(0.9)
Current accident year catastrophe losses 1.2 0.4 0.8 1.3 0.8 0.5 Prior accident years before catastrophe losses (0.4) (1.5) 1.1 (2.4) 1.5 (3.9) Prior accident years catastrophe losses (0.1) 0.1 (0.2) (0.2) (0.1) (0.1) Loss and loss expenses 60.2 61.0 (0.8) 59.3 63.7 (4.4) Underwriting expenses 24.9 28.5 (3.6) 26.2 27.0 (0.8) Combined ratio 85.1 % 89.5 % (4.4) 85.5 % 90.7 % (5.2) Combined ratio 85.1 % 89.5 % (4.4) 85.5 % 90.7 % (5.2) Contribution from catastrophe losses and prior years reserve development 0.7 (1.0) 1.7 (1.3) 2.2
(3.5)
Combined ratio before catastrophe losses and prior years reserve development 84.4 % 90.5 % (6.1) 86.8 % 88.5 % (1.7) Overview
Performance highlights for the excess and surplus lines segment include:
•Premiums - Excess and surplus lines net written premiums continued to grow during the second quarter and first six 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 31% and 28% for the three and six months endedJune 30, 2022 , compared with the same periods of 2021, reflecting the opportunity to renew many accounts for the first time, as well as higher renewal pricing. For the first six 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 decreased by 8% for the second quarter and increased 6% for the first six months of 2022 compared with the same periods of 2021. As we continued to carefully underwrite each policy in a highly competitive market, competition for larger policies was particularly strong during the second quarter. 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 Second-Quarter 2022 10-Q Page 47 --------------------------------------------------------------------------------
Excess and Surplus Lines Insurance Premiums
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Agency renewal written premiums $ 110 $ 84 31 $ 204 $ 160 28
Agency new business written
premiums 33 36 (8) 69 65 6
Other written premiums (8) (5) (60) (14) (11) (27)
Net written premiums 135 115 17 259 214 21
Unearned premium change (11) (20) 45 (23) (30) 23
Earned premiums $ 124 $ 95 31 $ 236 $ 184 28
•Combined ratio - The excess and surplus lines combined ratio improved by 4.4
for the second quarter and 5.2 percentage points for the first six months of
2022, compared with the same periods of 2021, primarily due to a lower
second-quarter 2022 underwriting expense ratio and favorable reserve development
on prior accident years before catastrophe losses for the six-month period.
The ratio for current accident year loss and loss expenses before catastrophe
losses for excess and surplus lines improved in the first six months of 2022.
That 60.6% ratio was 0.9 percentage points lower, compared with the 61.5%
accident year 2021 ratio measured as of June 30, 2021 , including an increase of
1.3 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 0.5% for the second quarter and 2.6%
for the first six months of 2022, compared with favorable 1.4% for the second
quarter of 2021 and unfavorable net reserve development of 1.4% for the first
six months of 2021. The $6 million of net favorable reserve development
recognized during the first six 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 decreased for the second
quarter and first six months of 2022, compared with the same periods of 2021,
largely due to a decrease in commissions for agencies and related expenses. The
ratios also included ongoing expense management efforts and higher
earned premiums.
Cincinnati Financial Corporation Second-Quarter 2022 10-Q
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Excess and Surplus Lines Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance) Three months ended June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Current accident year losses greater
than $5 million $ - $ - nm $ - $ - 0
Current accident year losses $1
million - $5 million 9 7 29 13 8 63
Large loss prior accident year
reserve development 1 1 0 1 - nm
Total large losses incurred 10 8 25 14 8 75
Losses incurred but not reported 1 1 0 13 23 (43)
Other losses excluding catastrophe
losses 38 34 12 70 49 43
Catastrophe losses 2 - nm 3 1 200
Total losses incurred $ 51 $ 43 19 $ 100 $ 81 23
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 7.8 7.5 0.3 5.8 4.5 1.3 Large loss prior accident year reserve development 0.4 1.3 (0.9) 0.3 (0.2) 0.5 Total large loss ratio 8.2 8.8 (0.6) 6.1 4.3 1.8 Losses incurred but not reported 0.7 0.8 (0.1) 5.4 12.3 (6.9) Other losses excluding catastrophe losses 31.5 35.0 (3.5) 29.6 26.8 2.8 Catastrophe losses 1.1 0.4 0.7 1.1 0.7 0.4 Total loss ratio 41.5 % 45.0 % (3.5) 42.2 % 44.1 % (1.9) 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 second quarter of 2022, the excess and surplus lines total ratio for large losses, net of reinsurance, was 0.6 percentage points lower than last year's second quarter. The second-quarter 2022 amount of total large losses incurred contributed to the increase in the six-month 2022 total large loss ratio, compared with 2021, in addition to a first-quarter 2022 ratio that was 4.4 points higher than the first quarter of 2021. We believe results for the three- and six-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above$1 million . Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 49 --------------------------------------------------------------------------------
LIFE INSURANCE RESULTS
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Earned premiums $ 76 $ 79 (4) $ 148 $ 148 0
Fee revenues 1 1 0 2 2 0
Total revenues 77 80 (4) 150 150 0
Contract holders' benefits
incurred 69 85 (19) 152 165 (8)
Investment interest credited to
contract holders (28) (27) (4) (55) (53) (4)
Underwriting expenses incurred 23 24 (4) 42 42 0
Total benefits and expenses 64 82 (22) 139 154 (10)
Life insurance segment profit
(loss) $ 13 $ (2) nm $ 11 $ (4) nm
Overview
The COVID-19 pandemic did not have a significant effect on our life insurance
segment earned premiums or expenses for the first six months of 2022. However,
the pandemic did contribute to a moderate increase in death claims, primarily in
the first three months of 2022. 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 decreased by less than$1 million for the six months endedJune 30, 2022 , compared with the same period a year ago, driven by favorable impacts in the same period of 2021 from the unlocking of interest rate and other actuarial assumptions. Earned premiums from term life insurance, our largest life insurance product line, increased over the same period of 2021.
Net in-force life insurance policy face amounts increased 2% to
at
Fixed annuity deposits received for the three and six months endedJune 30, 2022 , were$5 million and$13 million , compared with$10 million and$27 million for the same periods of 2021. Fixed annuity deposits have a minimal impact to earned premiums because deposits received are initially recorded as liabilities. Profit is earned over time by way of interest rate spreads. We do not write variable or equity-indexed annuities. Life Insurance Premiums (Dollars in millions) Three months ended June 30, Six months ended June 30, 2022 2021 % Change 2022 2021 % Change Term life insurance$ 56 $ 52 8 $ 110$ 103 7 Whole life insurance 12 11 9 23 22 5 Universal life and other 8 16 (50) 15 23 (35) Net earned premiums$ 76 $ 79 (4) $ 148$ 148 0 •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 profit of$11 million for our life insurance segment in the first six months of 2022, compared with a$4 million loss for the same period of 2021, was primarily due to more favorable impacts from the unlocking of interest rate and other actuarial assumptions. 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 decreased in the first six months of 2022. Life policy and investment contract reserves increased with continued growth in net in-force life insurance policy face amounts and were partially offset by favorable effects from the unlocking of interest rate and other actuarial assumptions. Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 50 -------------------------------------------------------------------------------- Mortality results increased marginally compared with the same period of 2021 and were above our 2022 projections, due in part to pandemic-related death claims incurred in the first three months of 2022.
Underwriting expenses for the first six months of 2022 were slightly higher
compared to the same period a year ago, as higher commission and general expense
levels compared to the same period of 2021 were mostly offset by favorable
impacts from the unlocking of interest rate and other actuarial assumptions.
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$21 million and$31 million for the three and six months endedJune 30, 2022 , compared with$14 million and$24 million for the three and six months endedJune 30, 2021 . The life insurance company portfolio had net after-tax investment gains and net after-tax investment losses of less than$1 million for the three and six months endedJune 30, 2022 , respectively, compared with net after-tax investment gains of$3 million for the three and six months endedJune 30, 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 11% for the second quarter and 9% for the first six months of 2022, compared with the same periods of 2021. Interest income increased by$7 million and$12 million for the three and six months endedJune 30, 2022 , as net purchases of fixed-maturity securities in recent quarters generally offset effects of the low interest rate environment of the past several years. Higher dividend income reflected rising dividend rates and net purchases of equity securities in recent quarters, helping dividend income to grow by$12 million and$19 million for the three and six months endedJune 30, 2022 . Investments Results (Dollars in millions) Three months ended June 30, Six months ended June 30, 2022 2021 % Change 2022 2021 % Change Total investment income, net of expenses$ 195 $ 175 11 $ 380$ 349 9 Investment interest credited to contract holders (28) (27) (4) (55) (53) (4) Investment gains and losses, net (1,154) 520 nm (1,820) 1,024 nm
Investments profit (loss), pretax
nm$ (1,495) $ 1,320 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 June 30, 2022 % Yield redemptions Fixed-maturity pretax yield profile: Expected to mature during the remainder of 2022 3.36 % $ 312 Expected to mature during 2023 3.75 781 Expected to mature during 2024 4.31 987 Average yield and total expected maturities from the remainder of 2022 through 2024 3.96$ 2,080 Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 51
--------------------------------------------------------------------------------
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 six months
of 2022 was higher 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 4.00% for the first six months of 2022, from the
investment income table below, was lower than the 4.02% yield for the year-end
2021 fixed-maturities portfolio.
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Average pretax yield-to-amortized cost on
new fixed-maturities:
Acquired taxable fixed-maturities 4.98 % 3.36 % 4.39 % 3.50 %
Acquired tax-exempt fixed-maturities 4.00 2.40 3.57 2.64
Average total fixed-maturities acquired 4.75 3.33 4.23 3.47
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.
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Investment income:
Interest $ 124 $ 117 6 $ 247 $ 235 5
Dividends 72 60 20 137 118 16
Other 2 1 100 3 3 0
Less investment expenses 3 3 0 7 7 0
Investment income, pretax 195 175 11 380 349 9
Less income taxes 31 27 15 60 54 11
Total investment income, after-tax $ 164 $ 148 11 $ 320 $ 295 8
Investment returns:
Average invested assets plus cash
and cash
equivalents $ 23,918 $ 22,619 $ 24,255 $ 22,259
Average yield pretax 3.26 % 3.09 % 3.13 % 3.14 %
Average yield after-tax 2.74 2.62 2.64 2.65
Effective tax rate 15.9 15.5 15.8 15.5
Fixed-maturity returns:
Average amortized cost $ 12,414 $ 11,653 $ 12,364 $ 11,570
Average yield pretax 4.00 % 4.02 % 4.00 % 4.06 %
Average yield after-tax 3.31 3.35 3.32 3.38
Effective tax rate 17.1 16.7 17.0 16.7
Cincinnati Financial Corporation Second-Quarter 2022 10-Q
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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 June 30, Six months ended June 30,
2022 2021 2022 2021
Investment gains and losses:
Equity securities:
Investment gains and losses on securities
sold, net $ 5 $ - $ 37 $ 6
Unrealized gains and losses on securities
still held, net (1,175) 489 (1,882) 974
Subtotal (1,170) 489 (1,845) 980
Fixed maturities:
Gross realized gains 2 11 6 14
Gross realized losses (2) (2) (3) (2)
Subtotal - 9 3 12
Other 16 22 22 32
Total investment gains and losses reported
in net income (1,154) 520 (1,820) 1,024
Change in unrealized investment gains and
losses:
Fixed maturities (610) 132 (1,356) (64)
Total $ (1,764) $ 652 $ (3,176) $ 960
Of the 4,420 fixed-maturity securities in the portfolio, seven securities were
trading below 70% of amortized cost at June 30, 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 six 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 six months of 2021.
Cincinnati Financial Corporation Second-Quarter 2022 10-Q
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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 six 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$46 million and$12 million , respectively. Total expenses for Other increased for the first six months of 2022, primarily due to loss and loss expenses and also underwriting expenses from Cincinnati Re and Cincinnati Global. Other profit in the table below represents profit or losses before income taxes. For all periods shown, underwriting profit in aggregate from Cincinnati Re and Cincinnati Global offset interest expense from debt of the parent company. (Dollars in millions) Three months ended June 30, Six months ended June 30, 2022 2021 % Change 2022 2021 % Change Interest and fees on loans and leases$ 2 $ 2 0$ 3 $ 3 0 Earned premiums 166 126 32 308 250 23 Other revenues 1 1 0 2 2 0 Total revenues 169 129 31 313 255 23 Interest expense 13 13 0 26 26 0 Loss and loss expenses 77 51 51 166 139 19 Underwriting expenses 49 38 29 94 76 24 Operating expenses 5 5 0 9 9 0 Total expenses 144 107 35 295 250 18 Total other profit$ 25 $ 22 14$ 18 $ 5 260 TAXES We had$233 million and$320 million of income tax benefit for the three and six months endedJune 30, 2022 , compared with$169 million and$317 million of income tax expense for the same periods of 2021. The effective tax rate for the three and six months endedJune 30, 2022 , was 22.4% and 22.8% compared with 19.4% and 19.3% 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. Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 54 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
AtJune 30, 2022 , shareholders' equity was$10.553 billion , compared with$13.105 billion atDecember 31, 2021 . Total debt was$833 million atJune 30, 2022 , down$10 million fromDecember 31, 2021 . AtJune 30, 2022 , cash and cash equivalents totaled$1.098 billion , compared with$1.139 billion atDecember 31, 2021 . The pandemic did not have a significant effect on our cash flows for the first half 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 half of 2022, compared with$258 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):
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2022 2021 % Change 2022 2021 % Change
Premiums collected $ 1,763 $ 1,568 12 $ 3,477 $ 3,091 12
Loss and loss expenses paid (892) (767) (16) (1,782) (1,472) (21)
Commissions and other underwriting
expenses paid (489) (433) (13) (1,200) (1,004) (20)
Cash flow from underwriting 382 368 4 495 615 (20)
Investment income received 138 120 15 266 241 10
Cash flow from operations $ 520 $ 488 7 $ 761 $ 856 (11)
Collected premiums for property casualty insurance rose $386 million during the
first six months of 2022, compared with the same period in 2021. Loss and loss
expenses paid for the 2022 period increased $310 million . Commissions and other
underwriting expenses paid increased $196 million .
Cincinnati Financial Corporation Second-Quarter 2022 10-Q
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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
AtJune 30, 2022 , our debt-to-total-capital ratio was 7.3%, considerably below our 35% covenant threshold, with$789 million in long-term debt and$44 million in borrowing on our revolving short-term line of credit. AtJune 30, 2022 ,$256 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 atJune 30, 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 atJune 30, 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 six 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$812 million in the first half 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
2022.
There were no contributions to our qualified pension plan during the first half
of 2022.
Cincinnati Financial Corporation Second-Quarter 2022 10-Q
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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 six months of 2022, we used$208 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 atJune 30, 2022 , increased$374 million compared withDecember 31, 2021 . Case loss reserves increased by$149 million , IBNR loss reserves increased by$187 million and loss expense reserves increased by$38 million . The total gross increase was primarily due to our commercial casualty and commercial property lines of business, our excess and surplus lines insurance segment and also Cincinnati Re. Cincinnati Financial Corporation Second-Quarter 2022 10-Q Page 57 --------------------------------------------------------------------------------
Property Casualty Gross Reserves
(Dollars in millions) Loss reserves
Case IBNR Loss expense Total gross Percent of
At June 30, 2022 reserves reserves reserves reserves total
Commercial lines insurance:
Commercial casualty $ 1,111 $ 791 $ 714 $ 2,616 34.4 %
Commercial property 359 124 73 556 7.3
Commercial auto 430 224 123 777 10.2
Workers' compensation 430 523 82 1,035 13.6
Other commercial 93 15 121 229 3.0
Subtotal 2,423 1,677 1,113 5,213 68.5
Personal lines insurance:
Personal auto 215 65 59 339 4.5
Homeowner 190 98 44 332 4.4
Other personal 99 84 5 188 2.5
Subtotal 504 247 108 859 11.4
Excess and surplus lines 281 199 176 656 8.6
Cincinnati Re 130 515 4 649 8.5
Cincinnati Global 142 82 2 226 3.0
Total $ 3,480 $ 2,720 $ 1,403 $ 7,603 100.0 %
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 Second-Quarter 2022 10-Q
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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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