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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 September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
Earned premiums $ 1,882 $ 1,669 13 $ 5,345 $ 4,806 11
Investment income, net of expenses
(pretax) 193 179 8 573 528 9
Investment gains and losses, net
(pretax) (674) (70) nm (2,494) 954 nm
Total revenues 1,408 1,785 (21) 3,443 6,307 (45)
Net income (loss) (418) 153 nm (1,499) 1,476 nm
Comprehensive income (loss) (823) 85 nm (2,975) 1,370 nm
Net income (loss) per share-diluted (2.64) 0.94 nm (9.41) 9.07 nm
Cash dividends declared per share 0.69 0.63 10 2.07 1.89 10
Diluted weighted average shares
outstanding 158.0 162.9 (3) 159.3 162.8 (2)
Total revenues decreased $377 million for the third quarter of 2022, compared
with the third quarter of 2021, as a reduction in net investment gains offset
increases in earned premiums and investment income. For the first nine months of
2022, compared with the same period of 2021, total revenues decreased $2.864
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 third quarter of 2022, compared with third-quarter 2021 net
income, was a change of $571 million , including a decrease of $476 million in
after-tax net investment gains and losses and a decrease of $114 million in
after-tax property casualty underwriting income that offset an increase of $12
million in after-tax investment income. Catastrophe losses for the third quarter
of 2022, mostly weather related, were $19 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 $16 million
compared with the third quarter of 2021. Third-quarter 2022 net income included
a $34 million benefit from the release of an uncertain tax position related to
the IRS examination of the tax year ended December 31, 2018 , and is part of
after-tax property casualty underwriting income.
For the first nine months of 2022, net income decreased $2.975 billion , compared
with the first nine months of 2021, including decreases of $2.723 billion in
after-tax investment gains and losses and $305 million in after-tax property
casualty underwriting income that offset an increase of $36 million in after-tax
investment income. The property casualty underwriting income decrease included
an unfavorable $40 million after-tax effect from higher catastrophe losses.
Life insurance segment results increased by $31 million on a pretax basis. The
nine-month 2022 net income and after-tax property casualty underwriting income
included the $34 million benefit from the release of an uncertain tax position
noted above.
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, incurred losses for the first nine
months of 2022 for several lines of business were higher than in prior periods
and are discussed in Financial Results by property casualty insurance segment.
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During the first nine months of 2022, SARS-CoV-2, also known as COVID-19 and
recognized as a pandemic by the World Health Organization , continued to cause
various effects in parts of the world. We believe it did not have a significant
effect on our premium revenues during the first nine months of 2022 and there
were no material changes to our estimates for incurred losses and expenses
related to the pandemic.
Performance by segment is discussed below in Financial Results. As discussed in
our 2021 Annual Report on Form 10-K, Item 7, Executive Summary, Page 47, there
are several reasons why our performance during 2022 may be below our long-term
targets.
The board of directors is committed to rewarding shareholders directly through
cash dividends and through share repurchase authorizations. Through 2021, the
company had increased the annual cash dividend rate for 61 consecutive years, a
record we believe is matched by only seven other U.S. publicly traded companies.
In January 2022 , the board of directors increased the regular quarterly dividend
to 69 cents per share, setting the stage for our 62nd consecutive year of
increasing cash dividends. During the first nine 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 September 30, At December 31,
2022 2021
Total investments $ 20,988 $ 24,666
Total assets 28,199 31,387
Short-term debt 44 54
Long-term debt 789 789
Shareholders' equity 9,431 13,105
Book value per share 60.01 81.72
Debt-to-total-capital ratio 8.1 %
6.0 %
Total assets atSeptember 30, 2022 , decreased 10% compared with year-end 2021, and included a 15% decrease in total investments that reflected net purchases that were offset by lower fair values for many securities in our portfolio. Shareholders' equity decreased 28% and book value per share decreased 27% during the first nine 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 24.0% for the first nine 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$21.71 decrease in book value per share during the first nine months of 2022 contributed negative 26.5 percentage points to the value creation ratio, while dividends declared at$2.07 per share contributed positive 2.5 points. Value creation ratios by major components and in total, along with calculations from per-share amounts, are shown in the tables below. Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Value creation ratio major components: Net income before investment gains 1.1 % 1.8 % 3.7 % 6.7 % Change in fixed-maturity securities, realized and unrealized gains (3.9) (0.5) (11.5) (1.0) Change in equity securities, investment gains (5.2) (0.7) (15.6) 6.4 Other (0.4) 0.1 (0.6) 0.3 Value creation ratio (8.4) % 0.7 % (24.0) % 12.4 %
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(Dollars are per share) Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Value creation ratio:
End of period book value* $ 60.01 $ 73.49 $ 60.01 $ 73.49
Less beginning of period book value 66.30 73.57 81.72 67.04
Change in book value (6.29) (0.08) (21.71) 6.45
Dividend declared to shareholders 0.69 0.63 2.07 1.89
Total value creation $ (5.60)
Value creation ratio from change in book value** (9.4) % (0.1) % (26.5) % 9.6 % Value creation ratio from dividends declared to shareholders*** 1.0 0.8 2.5 2.8 Value creation ratio (8.4) % 0.7 % (24.0) % 12.4 %
* 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. AtSeptember 30, 2022 , we actively marketed through 1,971 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 nine months of 2022, our consolidated property casualty net written premium year-over-year growth was 14%, comparing favorably with the industry's 11% growth rate reported byA.M. Best for the first six months of 2022. 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 nine months of 2022, our GAAP combined ratio was 99.2%, including 10.9 percentage points of current accident year catastrophe losses partially offset by 2.8 percentage points of favorable loss reserve development on prior accident years. Our statutory combined ratio was 98.1% for the first nine months of 2022, comparing favorably with the industry's 100.0% reported byA.M. Best for the first six months of 2022. The industry's ratio again excludes its mortgage and financial guaranty lines of business. •Investment contribution - We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year return of theStandard & Poor's 500 Index. For the first nine months of 2022, pretax investment income was$573 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 Third-Quarter 2022 10-Q Page 34 --------------------------------------------------------------------------------
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. AtSeptember 30, 2022 , we held$3.888 billion of our cash and cash equivalents and invested assets at the parent-company level, of which$3.648 billion , or 93.8%, was invested in common stocks, and$105 million , or 2.7%, was cash or cash equivalents. Our debt-to-total-capital ratio was 8.1% atSeptember 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 endedSeptember 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. AtOctober 28, 2022 , our insurance subsidiaries continued to be highly rated. Insurer Financial Strength Ratings Rating Life insurance agency Standard market property casualty insurance subsidiaries subsidiary Excess and surplus lines insurance subsidiary Outlook Rating Rating Rating tier tier tierA.M. Best Co. A+ Superior 2 of 16 A+ Superior 2 of 16 A+ Superior 2 of 16 Stable ambest.com Fitch Ratings A+ Strong 5 of 21 A+ Strong 5 of 21 - - - Stable fitchratings.comMoody's Investors Service A1 Good 5 of 21 - - - - - - Stable moodys.comS&P Global Ratings A+ Strong 5 of 21 A+ Strong 5 of 21 - - - Stable spratings.com
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CONSOLIDATED PROPERTY CASUALTY INSURANCE HIGHLIGHTS
Consolidated property casualty insurance results include premiums and expenses for our standard market insurance segments (commercial lines and personal lines), our excess and surplus lines segment, Cincinnati Re® and ourLondon -based global specialty underwriter Cincinnati Global Underwriting Ltd.SM (Cincinnati Global). (Dollars in millions) Three months ended September 30, Nine months ended September 30, 2022 2021 % Change 2022 2021 % Change Earned premiums $ 1,809$ 1,596 13 $ 5,124$ 4,585 12 Fee revenues 3 3 0 8 8 0 Total revenues 1,812 1,599 13 5,132 4,593 12 Loss and loss expenses from: Current accident year before catastrophe losses 1,116 872 28 3,127 2,583
21
Current accident year catastrophe losses 275 218 26 560 489 15 Prior accident years before catastrophe losses (20) (112) 82 (74) (282) 74 Prior accident years catastrophe losses (23) 10 nm (69) (49) (41) Loss and loss expenses 1,348 988 36 3,544 2,741 29 Underwriting expenses 530 490 8 1,541 1,377 12 Underwriting profit (loss) $ (66)$ 121 nm $ 47$ 475
(90)
Ratios as a percent of earned premiums: Pt. Change Pt.
Change
Current accident year before catastrophe losses 61.7 % 54.7 % 7.0 61.0 % 56.3 %
4.7
Current accident year catastrophe losses 15.2 13.6 1.6 10.9 10.7 0.2 Prior accident years before catastrophe losses (1.1) (7.0) 5.9 (1.4) (6.1) 4.7 Prior accident years catastrophe losses (1.3) 0.6 (1.9) (1.4) (1.1) (0.3) Loss and loss expenses 74.5 61.9 12.6 69.1 59.8 9.3 Underwriting expenses 29.4 30.7 (1.3) 30.1 30.0 0.1 Combined ratio 103.9 % 92.6 % 11.3 99.2 % 89.8 % 9.4 Combined ratio 103.9 % 92.6 % 11.3 99.2 % 89.8 % 9.4 Contribution from catastrophe losses and prior years reserve development 12.8 7.2 5.6 8.1 3.5
4.6
Combined ratio before catastrophe losses and prior years reserve development 91.1 % 85.4 % 5.7 91.1 % 86.3 % 4.8 Our consolidated property casualty insurance operations generated an underwriting loss of$66 million for the third quarter of 2022 and an underwriting profit of$47 million for the first nine months of the year. The third-quarter 2022 change of$187 million from an underwriting profit for the same period a year ago included an unfavorable increase of$24 million in losses from catastrophes, mostly caused by severe weather. The nine-month underwriting profit decrease of$428 million , compared with the first nine months of 2021, included an unfavorable increase of$51 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 Third-Quarter 2022 10-Q Page 36 -------------------------------------------------------------------------------- For all property casualty lines of business in aggregate, net loss and loss expense reserves atSeptember 30, 2022 , were$814 million , or 12%, higher than at year-end 2021, including an increase of$620 million for the incurred but not 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 third quarter of 2022 rose by 11.3 percentage points, compared with the same period of 2021, including a decrease of 0.3 points from higher catastrophe losses and loss expenses that were outpaced by growth in earned premiums. For the first nine months of 2022, compared with the 2021 nine-month period, our combined ratio rose by 9.4 percentage points, including a decrease of 0.1 point from higher catastrophe losses and loss expenses that were outpaced by growth in earned premiums. 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 2.8 percentage points in the first nine 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 nine months of 2022. That 61.0% ratio was 4.7 percentage points higher, compared with the 56.3% accident year 2021 ratio measured as ofSeptember 30, 2021 , including an increase of 2.3 points in the ratio for large losses of$1 million or more per claim, discussed below. The underwriting expense ratio decreased for the third quarter and increased slightly for the first nine months of 2022, compared with the same periods a year ago. The third-quarter 2022 decrease was primarily due to a decrease in profit-sharing commissions for agencies, while the nine-month increase was primarily due to an increase in commissions for agencies. The ratios also included ongoing expense management efforts and higher earned premiums. Cincinnati Financial Corporation Third-Quarter 2022 10-Q Page 37 --------------------------------------------------------------------------------
Consolidated Property Casualty Insurance Premiums
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
Agency renewal written premiums $ 1,390 $ 1,244 12 $ 4,269 $ 3,853 11
Agency new business written
premiums 264 230 15 794 685 16
Other written premiums 96 64 50 550 407 35
Net written premiums 1,750 1,538 14 5,613 4,945 14
Unearned premium change 59 58 2 (489) (360) (36)
Earned premiums $ 1,809 $ 1,596 13 $ 5,124 $ 4,585 12
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 nine
months ended September 30, 2022 , grew $212 million and $668 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.
Consolidated property casualty agency new business written premiums increased by
$34 million and $109 million for the third quarter and first nine months of
2022, compared with the same periods of 2021. New agency appointments during
2022 and 2021 produced an $11 million increase in standard lines new business
for the first nine 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 $29 million and $129 million for the three months and nine months
ended September 30, 2022 , compared with the same periods of 2021, to $86 million
and $518 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 $10 million and $42 million , for the three and nine
months ended September 30, 2022 , compared with the same periods of 2021, to
$57 million and $177 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 $11 million and $26 million for the third quarter and first nine
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 13.9 and 9.5 percentage points to the
combined ratio in the third quarter and first nine months of 2022, compared with
14.2 and 9.6 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. Losses estimated for Hurricane Ian as ofSeptember 30, 2022 , did not reach a level applicable for reinsurance recovery. Ultimate loss experience could be lower or higher than that estimate and higher amounts could exceed our loss retention amount of$100 million , triggering the retrocession coverage in the future. 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, and Item 1A, Risk Factors, Page 32. Losses estimated for Cincinnati Financial Corporation Third-Quarter 2022 10-Q Page 38 -------------------------------------------------------------------------------- Hurricane Ian as ofSeptember 30, 2022 , included a high degree of reliance on third-party catastrophe models and industry estimates because the event occurred near the end of the third-quarter 2022 reporting period. Our own proprietary adjustments and ultimate loss estimates will develop as more information is reported by affected ceding companies. 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. The following table shows consolidated property casualty insurance catastrophe losses and loss expenses incurred, net of reinsurance, as well as the effect of loss development on prior period catastrophe events. We individually list declared catastrophe events for which our incurred losses reached or exceeded$10 million .
Consolidated Property Casualty Insurance Catastrophe Losses and Loss Expenses
Incurred
(Dollars in millions, net of reinsurance) Three months endedSeptember 30 , Nine months endedSeptember 30 , Comm. Pers. E&S Comm. Pers. E&S Dates Region lines lines lines Other Total lines lines lines Other Total 2022Apr. 10-14 Midwest, South, West$ (4) $ (2) $ - $ -$ (6) $ 13 $ 9 $ - $ -$ 22 Apr. 15-19 Northeast, South (2) (1) - - (3) 14 2 - - 16May 1-3 Midwest, South, West - - - - - 8 9 - - 17May 9-10 Midwest 1 - - - 1 20 4 - - 24May 11-12 Midwest, South 1 - - - 1 14 5 - - 19May 19-22 Midwest, Northeast, South 1 4 - - 5 7 15 - - 22Jun. 4-8 Midwest, South, West 1 (1) - - - 14 3 - - 17Jun. 11-17 Midwest, Northeast, South 1 (2) - - (1) 18 17 - - 35 Sep. 27 -Oct. 1 South (Ian) 26 51 - 143 220 26 51 - 143 220 All other 2022 catastrophes 25 27 - 6 58 67 79 3 19 168 Development on 2021 and prior catastrophes (4) (7) - (12) (23) (17) (40) - (12) (69) Calendar year incurred total $ 46$ 69 $ -$ 137 $ 252 $ 184 $ 154 $ 3 $ 150 $ 491 2021Feb. 12-15 South, West$ (1) $ - $ -$ (10) $ (11) $ 9 $ 5 $ -$ 37 $ 51 Feb. 16-20 Midwest, Northeast, South (3) (3) - (2) (8) 21 30 1 9 61Mar. 24-26 Midwest, Northeast, South (1) (1) - - (2) 12 18 - - 30Mar. 27-29 Midwest, Northeast, South 1 (1) - - - 4 8 - - 12May 3-4 South (2) - - - (2) 9 4 - - 13Jun. 17-20 Midwest 6 2 - - 8 12 16 - - 28 Jun. 24 - Jul. 1 Midwest, Northeast, South, West 3 6 - - 9 5 12 - - 17Aug. 10-13 Midwest, Northeast, South 6 9 - - 15 6 9 - -15 Aug. 29 -Sep. 2 Northeast, South (Ida) 18 42 - 109 169 18 42 - 109 169 All other 2021 catastrophes 10 24 1 5 40 34 53 1 5 93 Development on 2020 and prior catastrophes (5) - - 15 10 (32) (4) - (13) (49) Calendar year incurred total $ 32$ 78 $ 1 $ 117 $ 228 $ 98 $ 193 $ 2 $ 147 $ 440 Cincinnati Financial Corporation Third-Quarter 2022 10-Q Page 39
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The following table includes data for losses incurred of
claim, net of reinsurance.
Consolidated Property Casualty Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance) Three months ended September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
Current accident year losses greater
than $5 million $ 38 $ 14 171 $ 99 $ 57 74
Current accident year losses $1
million - $5 million 95 72 32 254 154 65
Large loss prior accident year
reserve development 13 30 (57) 76 67 13
Total large losses incurred 146 116 26 429 278 54
Losses incurred but not reported 131 (13) nm 241 52 363
Other losses excluding catastrophe
losses 649 514 26 1,889 1,542 23
Catastrophe losses 246 215 14 478 421 14
Total losses incurred $ 1,172 $ 832 41 $ 3,037 $ 2,293 32
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year losses greater
than $5 million 2.1 % 0.9 % 1.2 1.9 % 1.2 % 0.7
Current accident year losses $1
million - $5 million 5.3 4.5 0.8 5.0 3.4 1.6
Large loss prior accident year
reserve development 0.7 1.9 (1.2) 1.5 1.5 0.0
Total large loss ratio 8.1 7.3 0.8 8.4 6.1 2.3
Losses incurred but not reported 7.2 (0.8) 8.0 4.7 1.1 3.6
Other losses excluding catastrophe
losses 35.9 32.2 3.7 36.9 33.6 3.3
Catastrophe losses 13.6 13.4 0.2 9.3 9.2 0.1
Total loss ratio 64.8 % 52.1 % 12.7 59.3 % 50.0 % 9.3
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 third-quarter 2022 property casualty total large losses incurred
of $146 million , net of reinsurance, were higher than the $116 million quarterly
average during full-year 2021 and the $116 million experienced for the
third quarter of 2021. The ratio for these large losses was 0.8 percentage
points higher compared with last year's third quarter. The third-quarter 2022
amount of total large losses incurred helped contribute to the increase in the
nine-month 2022 total large loss ratio, compared with 2021, in addition to a
first-half 2022 ratio that was 3.1 points higher than the first half of 2021.
We believe results for the three- and nine-month periods largely reflected
normal fluctuations in loss patterns and normal variability in large case
reserves for claims above $1 million . Losses by size are discussed in further
detail in results of operations by property casualty insurance segment.
FINANCIAL RESULTS
Consolidated results reflect the operating results of each of our five segments
along with the parent company, Cincinnati Re, Cincinnati Global and other
activities reported as "Other." The five segments are:
•Commercial lines insurance
•Personal lines insurance
•Excess and surplus lines insurance
•Life insurance •Investments
Cincinnati Financial Corporation Third-Quarter 2022 10-Q
Page 40
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COMMERCIAL LINES INSURANCE RESULTS
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
Earned premiums $ 1,028 $ 930 11 $ 2,984 $ 2,727 9
Fee revenues 1 1 0 3 3 0
Total revenues 1,029 931 11 2,987 2,730 9
Loss and loss expenses from:
Current accident year before
catastrophe losses 664 521 27 1,896 1,580 20
Current accident year catastrophe
losses 50 37 35 201 130 55
Prior accident years before
catastrophe losses - (102) 100 (34) (244) 86
Prior accident years catastrophe
losses (4) (5) 20 (17) (32) 47
Loss and loss expenses 710 451 57 2,046 1,434 43
Underwriting expenses 308 298 3 916 839 9
Underwriting profit $ 11 $ 182 (94) $ 25 $ 457 (95)
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year before
catastrophe losses 64.5 % 56.1 % 8.4 63.5 % 57.9 % 5.6
Current accident year catastrophe
losses 4.9 3.9 1.0 6.8 4.8 2.0
Prior accident years before
catastrophe losses - (10.9) 10.9 (1.1) (8.9) 7.8
Prior accident years catastrophe
losses (0.4) (0.6) 0.2 (0.6) (1.2) 0.6
Loss and loss expenses 69.0 48.5 20.5 68.6 52.6 16.0
Underwriting expenses 30.0 32.1 (2.1) 30.7 30.8 (0.1)
Combined ratio 99.0 % 80.6 % 18.4 99.3 % 83.4 % 15.9
Combined ratio 99.0 % 80.6 % 18.4 99.3 % 83.4 % 15.9
Contribution from catastrophe losses
and
prior years reserve development 4.5 (7.6) 12.1 5.1 (5.3) 10.4
Combined ratio before catastrophe
losses and prior years reserve
development 94.5 % 88.2 % 6.3 94.2 % 88.7 % 5.5
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 nine months endedSeptember 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 11% for the third quarter and 9% for the first nine months of 2022, compared with the same periods of 2021, including price increases. During the third quarter of 2022, our overall standard commercial lines policies averaged estimated renewal price increases at percentages in the mid-single-digit range, somewhat higher than in the second quarter. 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 Third-Quarter 2022 10-Q Page 41 -------------------------------------------------------------------------------- Our average overall commercial lines renewal pricing change includes the impact of flat pricing for certain coverages within package policies written for a three-year term that were in force but did not expire during the period being measured. Therefore, our reported change in average commercial lines renewal pricing reflects a blend of three-year policies that did not expire and other policies that did expire during the measurement period. For commercial lines policies that did expire and were then renewed during the third quarter of 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 near the low end of the mid-single-digit range. Our nine-month 2022 increase of 9% for the commercial lines segment's agency renewal written premiums also included a higher level of insured exposures. Part of the insured exposure increase reflects our response to inflation effects that increase the cost of building materials to repair damaged commercial structures. We use building valuation software to automate much of that underwriting process and may also manually adjust premiums to reflect property costs. For our commercial property line of business, premium adjustments for such costs during the first nine months of 2022 are about double the level they were for the same period a year ago. Renewal premiums for certain policies, primarily our commercial casualty and workers' compensation lines of business, include the results of policy audits that adjust initial premium amounts based on differences between estimated and actual sales or payroll related to a specific policy. Audits completed during the first nine months of 2022 contributed$72 million to net written premiums, compared with$31 million for the same period of 2021. New business written premiums for commercial lines increased$4 million and$34 million during the third quarter and first nine 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$5 million and$14 million for the third quarter and first nine months of 2022, compared with the same periods of 2021. Commercial Lines Insurance Premiums (Dollars in millions) Three months ended September 30, Nine months ended September 30, 2022 2021 % Change 2022 2021 % Change Agency renewal written premiums$ 860 $ 775 11$ 2,764 $ 2,525 9 Agency new business written premiums 149 145 3 470 436 8 Other written premiums (25) (25) 0 (82) (70) (17) Net written premiums 984 895 10 3,152 2,891 9 Unearned premium change 44 35 26 (168) (164) (2) Earned premiums$ 1,028 $ 930 11$ 2,984 $ 2,727 9 •Combined ratio - The third-quarter 2022 commercial lines combined ratio increased by 18.4 percentage points, compared with the third quarter of 2021, including an increase of 1.2 points in losses from catastrophes. The third-quarter combined ratio also increased 8.4 points from current accident year loss and loss expenses before catastrophe losses, including 4.4 points from commercial umbrella coverages discussed below. For the first nine months of 2022, the combined ratio increased by 15.9 percentage points, compared with the same period a year ago, including an increase of 2.6 points in losses from catastrophes and an increase of 5.6 points from current accident year loss and loss expenses before catastrophe losses, including 3.8 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 ofSeptember 30 of the respective years and included a third-quarter 2022 increase of 3.1 percentage points and a nine-month increase of 2.6 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 Cincinnati Financial Corporation Third-Quarter 2022 10-Q Page 42 -------------------------------------------------------------------------------- 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 nine-month 2022 ratios for losses and expenses. For the first nine months of 2022, incurred losses and loss expenses for commercial umbrella coverages of$316 million increased$195 million or 161%, compared with the same period of 2021, in part due to paid losses of$177 million increasing$97 million or 121% while earned premiums rose 10%. Severe losses from commercial auto accidents were the primary source of our commercial umbrella claims during the first nine months of 2022 and also in recent years. 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$370 million for the first nine 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$10 million or less 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 4.5 and 6.2 percentage points of the combined ratio for the third quarter and first nine months of 2022, compared with 3.3 and 3.6 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 third quarter and first nine months of 2022 was favorable for commercial lines overall by$4 million and$51 million , compared with$107 million and$276 million for the same periods in 2021. For the first nine 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 , including$41 million from commercial umbrella coverages. The net favorable reserve development recognized during the first nine 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 third quarter of 2022 and was essentially unchanged for the first nine months of 2022, compared with the same periods a year ago. The third-quarter 2022 decrease was primarily due to a decrease in profit-sharing commissions for agencies. The ratios also included ongoing expense management efforts and higher earned premiums. Cincinnati Financial Corporation Third-Quarter 2022 10-Q Page 43 --------------------------------------------------------------------------------
Commercial Lines Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance) Three months ended September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
Current accident year losses greater
than $5 million $ 30 $ 4 nm $ 61 $ 47 30
Current accident year losses $1
million - $5 million 72 60 20 192 115 67
Large loss prior accident year
reserve development 12 29 (59) 69 69 0
Total large losses incurred 114 93 23 322 231 39
Losses incurred but not reported 97 (35) nm 196 (30) nm
Other losses excluding catastrophe
losses 345 270 28 1,026 857 20
Catastrophe losses 44 30 47 179 92 95
Total losses incurred $ 600 $ 358 68 $ 1,723 $ 1,150 50
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year losses greater
than $5 million 3.0 % 0.5 % 2.5 2.0 % 1.7 % 0.3
Current accident year losses $1
million - $5 million 7.1 6.5 0.6 6.5 4.2 2.3
Large loss prior accident year
reserve development 1.1 3.1 (2.0) 2.3 2.6 (0.3)
Total large loss ratio 11.2 10.1 1.1 10.8 8.5 2.3
Losses incurred but not reported 9.4 (3.7) 13.1 6.6 (1.1) 7.7
Other losses excluding catastrophe
losses 33.6 29.0 4.6 34.3 31.4 2.9
Catastrophe losses 4.2 3.1 1.1 6.0 3.4 2.6
Total loss ratio 58.4 % 38.5 % 19.9 57.7 % 42.2 % 15.5
We continue to monitor new losses and case reserve increases greater than $1
million for trends in factors such as initial reserve levels, loss cost
inflation and claim settlement expenses. Our analysis continues to indicate
no unexpected concentration of these large losses and case reserve increases by
risk category, geographic region, policy inception, agency or field marketing
territory. The third-quarter 2022 commercial lines total large losses incurred
of $114 million , net of reinsurance, were higher than the quarterly average of
$95 million during full-year 2021 and the $93 million of total large losses
incurred for the third quarter of 2021. The increase in commercial lines large
losses for the first nine months of 2022 was primarily due to our commercial
casualty and commercial property lines of business. The third-quarter 2022 ratio
for commercial lines total large losses was 1.1 percentage points higher than
last year's third-quarter ratio. The third-quarter 2022 amount of total large
losses incurred helped contribute to the increase in the nine-month 2022 total
large loss ratio, compared with 2021, in addition to a first-half 2022 ratio
that was 2.9 points higher than the first half of 2021. We believe results for
the three- and nine-month periods largely reflected normal fluctuations in loss
patterns and normal variability in large case reserves for claims
above $1 million .
Cincinnati Financial Corporation Third-Quarter 2022 10-Q
Page 44
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PERSONAL LINES INSURANCE RESULTS
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
Earned premiums $ 431 $ 388 11 $ 1,246 $ 1,146 9
Fee revenues 1 1 0 3 3 0
Total revenues 432 389 11 1,249 1,149 9
Loss and loss expenses from:
Current accident year before
catastrophe losses 256 206 24 740 633 17
Current accident year catastrophe
losses 76 78 (3) 194 197 (2)
Prior accident years before
catastrophe losses (1) (3) 67 (16) (31) 48
Prior accident years catastrophe
losses (7) - nm (40) (4) nm
Loss and loss expenses 324 281 15 878 795 10
Underwriting expenses 126 118 7 373 338 10
Underwriting profit (loss) $ (18) $ (10) (80) $ (2) $ 16 nm
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year before
catastrophe losses 59.5 % 53.1 % 6.4 59.4 % 55.2 % 4.2
Current accident year catastrophe
losses 17.7 20.1 (2.4) 15.6 17.2 (1.6)
Prior accident years before
catastrophe losses (0.2) (0.7) 0.5 (1.3) (2.7) 1.4
Prior accident years catastrophe
losses (1.8) (0.1) (1.7) (3.2) (0.4) (2.8)
Loss and loss expenses 75.2 72.4 2.8 70.5 69.3 1.2
Underwriting expenses 29.3 30.3 (1.0) 29.9 29.5 0.4
Combined ratio 104.5 % 102.7 % 1.8 100.4 % 98.8 % 1.6
Combined ratio 104.5 % 102.7 % 1.8 100.4 % 98.8 % 1.6
Contribution from catastrophe losses
and
prior years reserve development 15.7 19.3 (3.6) 11.1 14.1 (3.0)
Combined ratio before catastrophe
losses and prior years reserve
development 88.8 % 83.4 % 5.4 89.3 % 84.7 % 4.6
Overview
Performance highlights for the personal lines segment include:
•Premiums - Personal lines earned premiums and net written premiums continued to grow during the third quarter and first nine months of 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$249 million and$685 million for the third quarter and first nine months of 2022, compared with$180 million and$490 million for the same periods of 2021. The table below analyzes the primary components of premiums. Agency renewal written premiums increased 11% for both the third quarter and first nine 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. Part of the insured exposure increase reflects our response to inflation effects that increase the cost of building materials to repair damaged homes. In recent years, prior to 2022, our homeowner policies used inflation factors that adjusted premiums for such costs annually and averaged increases in the mid-single-digit percentage range. Beginning in 2022, the adjustment occurred quarterly and the inflation factors were in the high-single digit percentage range for both the second and third quarters. 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 nine months of 2022. We plan to increase rates more aggressively in future quarters. We expect full-year 2023 written premiums will include an average rate increase of approximately 10% for our personal auto line of business. For our homeowner line of business, we estimate that premium rates for the first nine months of 2022 increased at average percentages in the mid-single-digit range. Cincinnati Financial Corporation Third-Quarter 2022 10-Q Page 45 --------------------------------------------------------------------------------
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$28 million or 53% for the third quarter of 2022 and$69 million , including$60 million from high net worth policies, for the first nine months, compared with the same periods of 2021. Approximately$3 million of the third-quarter 2022 increase was from excess and surplus lines homeowner policies and$19 million was from other high net worth policies. We believe underwriting and 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$6 million for the third quarter and$10 million for the first nine months, compared with the same periods of 2021. Personal Lines Insurance Premiums (Dollars in millions) Three months ended September 30, Nine months ended September 30, 2022 2021 % Change 2022 2021 % Change Agency renewal written premiums$ 437 $ 393 11$ 1,208 $ 1,092 11 Agency new business written premiums 81 53 53 221 152 45 Other written premiums (16) (11) (45) (43) (32) (34) Net written premiums 502 435 15 1,386 1,212 14 Unearned premium change (71) (47) (51) (140) (66) (112) Earned premiums$ 431 $ 388 11$ 1,246 $ 1,146 9 •Combined ratio - Our personal lines combined ratio for the third quarter of 2022 increased by 1.8 percentage points, compared with third-quarter 2021, including a decrease of 4.1 points in losses from catastrophes and an increase of 6.4 points from current accident year loss and loss expenses before catastrophe losses. For the first nine months of 2022, the combined ratio increased by 1.6 percentage points, compared with the same period a year ago, including a decrease of 4.4 points in losses from catastrophes. The nine-month 2022 combined ratio also included an increase of 4.2 points from current accident year loss and loss expenses before catastrophe losses, with our personal auto line of business representing approximately 1 point and our homeowner line of business representing approximately 2 points. Those current accident year ratios were measured as ofSeptember 30 of the respective years and included a third-quarter 2022 increase of 0.1 percentage points and a nine-month increase of 2.9 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 nine months of 2022, personal auto incurred loss and loss expenses before catastrophe losses increased$39 million or 13%, compared with the same period of 2021, in part due to paid losses increasing$25 million or 17% while earned premiums rose 2%. Catastrophe losses and loss expenses accounted for 15.9 and 12.4 percentage points of the combined ratio for the third quarter and first nine months of 2022, compared with 20.0 and 16.8 percentage points for the same periods 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. Cincinnati Financial Corporation Third-Quarter 2022 10-Q Page 46 -------------------------------------------------------------------------------- The net effect of reserve development on prior accident years during the third quarter and first nine months of 2022 was favorable for personal lines overall by$8 million and$56 million , compared with$3 million and$35 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 nine months of 2022. The net favorable reserve development was primarily due to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2021 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 52. The personal lines underwriting expense ratio decreased for the third quarter and increased slightly for the first nine months of 2022, compared with the same periods a year ago. The third-quarter decrease was primarily due to a decrease in profit-sharing commissions for agencies, while the nine-month increase was 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 September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
Current accident year losses greater
than $5 million $ 8 $ 10 (20) $ 38 $ 10 280
Current accident year losses $1
million - $5 million 17 12 42 43 31 39
Large loss prior accident year
reserve development (1) (1) - 4 (4) nm
Total large losses incurred 24 21 14 85 37 130
Losses incurred but not reported 9 - nm 7 37 (81)
Other losses excluding catastrophe
losses 183 154 19 524 442 19
Catastrophe losses 66 69 (4) 150 182 (18)
Total losses incurred $ 282 $ 244 16 $ 766 $ 698 10
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year losses greater
than $5 million 1.9 % 2.6 % (0.7) 3.1 % 0.9 % 2.2
Current accident year losses $1
million - $5 million 3.7 2.9 0.8 3.4 2.7 0.7
Large loss prior accident year
reserve development - (0.2) 0.2 0.3 (0.4) 0.7
Total large loss ratio 5.6 5.3 0.3 6.8 3.2 3.6
Losses incurred but not reported 2.0 (0.1) 2.1 0.6 3.2 (2.6)
Other losses excluding catastrophe
losses 42.5 39.7 2.8 42.1 38.6 3.5
Catastrophe losses 15.5 17.7 (2.2) 12.0 15.9 (3.9)
Total loss ratio 65.6 % 62.6 % 3.0 61.5 % 60.9 % 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 third quarter of 2022, the personal lines total large loss
ratio, net of reinsurance, was 0.3 percentage points higher than last year's
third quarter. The increase in personal lines large losses for the first nine
months of 2022 occurred primarily for our homeowner line of business. The
third-quarter 2022 amount of total large losses incurred helped contribute to
the increase in the nine-month 2022 total large loss ratio, compared with 2021,
in addition to a first-half 2022 ratio that was 5.3 points higher than the first
half of 2021. We believe results for the three- and nine-month periods largely
reflected normal fluctuations in loss patterns and normal variability in large
case reserves for claims above $1 million .
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EXCESS AND SURPLUS LINES INSURANCE RESULTS
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
Earned premiums $ 125 $ 105 19 $ 361 $ 289 25
Fee revenues 1 1 0 2 2 0
Total revenues 126 106 19 363 291 25
Loss and loss expenses from:
Current accident year before
catastrophe losses 93 66 41 236 179 32
Current accident year catastrophe
losses - 1 (100) 3 2 50
Prior accident years before
catastrophe losses (7) 3 nm (13) 6 nm
Prior accident years catastrophe
losses - - 0 - - 0
Loss and loss expenses 86 70 23 226 187 21
Underwriting expenses 31 29 7 93 79 18
Underwriting profit $ 9 $ 7 29 $ 44 $ 25 76
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year before
catastrophe losses 74.8 % 62.6 % 12.2 65.4 % 61.9 % 3.5
Current accident year catastrophe
losses (0.4) 0.4 (0.8) 0.8 0.7 0.1
Prior accident years before
catastrophe losses (5.9) 3.3 (9.2) (3.6) 2.1 (5.7)
Prior accident years catastrophe
losses (0.1) (0.1) 0.0 (0.2) (0.1) (0.1)
Loss and loss expenses 68.4 66.2 2.2 62.4 64.6 (2.2)
Underwriting expenses 25.5 27.9 (2.4) 26.0 27.3 (1.3)
Combined ratio 93.9 % 94.1 % (0.2) 88.4 % 91.9 % (3.5)
Combined ratio 93.9 % 94.1 % (0.2) 88.4 % 91.9 % (3.5)
Contribution from catastrophe losses
and
prior years reserve development (6.4) 3.6 (10.0) (3.0) 2.7 (5.7)
Combined ratio before catastrophe
losses and prior years reserve
development 100.3 % 90.5 % 9.8 91.4 % 89.2 % 2.2
Overview
Performance highlights for the excess and surplus lines segment include:
•Premiums - Excess and surplus lines net written premiums continued to grow during the third quarter and first nine months of 2022, compared with the same period a year ago, primarily due to an increase in agency renewal written premiums. Renewal written premiums rose 22% and 26% for the three and nine months endedSeptember 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 nine months of 2022, excess and surplus lines policy renewals experienced estimated average price increases at percentages in the high-single-digit range. We measure average changes in excess and surplus lines renewal pricing as the percentage rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies. New business written premiums produced by agencies increased by 6% for both the third quarter and first nine months of 2022 compared with the same periods of 2021. Competition for larger policies has been particularly strong during the first nine months of 2022, as we continued to carefully underwrite each policy in this highly competitive market. Some of what we report as new business came from accounts that were not new to our agents. We believe our agents' seasoned accounts tend to be priced more accurately than business that may be less familiar to them. Cincinnati Financial Corporation Third-Quarter 2022 10-Q Page 48 --------------------------------------------------------------------------------
Excess and Surplus Lines Insurance Premiums
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
Agency renewal written premiums $ 93 $ 76 22 $ 297 $ 236 26
Agency new business written
premiums 34 32 6 103 97 6
Other written premiums (6) (4) (50) (20) (15) (33)
Net written premiums 121 104 16 380 318 19
Unearned premium change 4 1 300 (19) (29) 34
Earned premiums $ 125 $ 105 19 $ 361 $ 289 25
•Combined ratio - The excess and surplus lines combined ratio improved by 0.2
percentage points for the third quarter of 2022 and by 3.5 points for the first
nine months, compared with the same periods of 2021, primarily due to favorable
reserve development on prior accident years before catastrophe losses.
The ratio for current accident year loss and loss expenses before catastrophe
losses for excess and surplus lines rose for both the third quarter and first
nine months of 2022. That 65.4% nine-month ratio was 3.5 percentage points
higher, compared with the 61.9% accident year 2021 ratio measured as of
September 30, 2021 , including an increase of 2.4 percentage points in the ratio
for large losses of $1 million or more per claim, discussed below.
Excess and surplus lines net reserve development on prior accident years, as a
ratio to earned premiums, was a favorable 6.0% for the third quarter and 3.8%
for the first nine months of 2022, compared with unfavorable net reserve
development of 3.2% for the third quarter of 2021 and 2.0% for the first nine
months of 2021. The $13 million of net favorable reserve development recognized
during the first nine months of 2022 was primarily for accident year 2020. 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 third
quarter and first nine months of 2022, compared with the same periods of 2021,
largely due to a decrease in profit-sharing commissions for agencies. The ratios
also included ongoing expense management efforts and higher earned premiums.
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Excess and Surplus Lines Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance) Three months ended September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
Current accident year losses greater
than $5 million $ - $ - nm $ - $ -
nm
Current accident year losses$1 million -$5 million 6 - nm 19 8 138 Large loss prior accident year reserve development 2 2 0 3 2 50 Total large losses incurred 8 2 300 22 10 120 Losses incurred but not reported 25 22 14 38 45
(16)
Other losses excluding catastrophe losses 32 23 39 102 72 42 Catastrophe losses (1) 1 nm 2 2 0 Total losses incurred $ 64$ 48 33$ 164 $ 129 27 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 4.0 (0.1) 4.1 5.2 2.8
2.4
Large loss prior accident year reserve development 2.1 1.9 0.2 0.9 0.6 0.3 Total large loss ratio 6.1 1.8 4.3 6.1 3.4 2.7 Losses incurred but not reported 20.0 21.2 (1.2) 10.5 15.5
(5.0)
Other losses excluding catastrophe losses 26.3 21.9 4.4 28.4 25.0 3.4 Catastrophe losses (0.5) 0.2 (0.7) 0.6 0.5 0.1 Total loss ratio 51.9 % 45.1 % 6.8 45.6 % 44.4 % 1.2 We continue to monitor new losses and case reserve increases greater than$1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the third quarter of 2022, the excess and surplus lines total ratio for large losses, net of reinsurance, was 4.3 percentage points higher than last year's third quarter. The third-quarter 2022 amount of total large losses incurred contributed to the increase in the nine-month 2022 total large loss ratio, compared with 2021, in addition to a first-half 2022 ratio that was 1.8 points higher than the first half of 2021. We believe results for the three- and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above$1 million . Cincinnati Financial Corporation Third-Quarter 2022 10-Q Page 50 --------------------------------------------------------------------------------
LIFE INSURANCE RESULTS
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
Earned premiums $ 73 $ 73 0 $ 221 $ 221 0
Fee revenues 2 1 100 4 3 33
Total revenues 75 74 1 225 224 0
Contract holders' benefits
incurred 70 84 (17) 222 249 (11)
Investment interest credited to
contract holders (27) (26) (4) (82) (79) (4)
Underwriting expenses incurred 21 21 - 63 63 0
Total benefits and expenses 64 79 (19) 203 233 (13)
Life insurance segment profit
(loss) $ 11 $ (5) nm $ 22 $ (9) nm
Overview
The COVID-19 pandemic did not have a significant effect on our life insurance
segment earned premiums or expenses for the first nine months of 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 increased slightly for the nine months endedSeptember 30, 2022 , compared with the same period a year ago, driven by higher earned premiums from term life insurance, our largest life insurance product line.
Net in-force life insurance policy face amounts increased 3% to
at
Fixed annuity deposits received for the three and nine months endedSeptember 30, 2022 , were$10 million and$23 million , compared with$8 million and$35 million for the same periods of 2021. Fixed annuity deposits have a minimal impact to earned premiums because deposits received are initially recorded as liabilities. Profit is earned over time by way of interest rate spreads. We do not write variable or equity-indexed annuities. Life Insurance Premiums (Dollars in millions) Three months ended September 30, Nine months ended September 30, 2022 2021 % Change 2022 2021 % Change Term life insurance$ 55 $ 53 4$ 165 $ 156 6 Whole life insurance 11 13 (15) 34 35 (3) Universal life and other 7 7 0 22 30 (27) Net earned premiums$ 73 $ 73 0$ 221 $ 221 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$22 million for our life insurance segment in the first nine months of 2022, compared with a$9 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 and more favorable mortality experience. 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 nine 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 Third-Quarter 2022 10-Q Page 51 --------------------------------------------------------------------------------
Mortality results decreased compared with the same period of 2021, but were
above our 2022 projections, due to pandemic-related death claims incurred in the
first three months of 2022.
Underwriting expenses for the first nine months of 2022 were slightly lower
compared to the same period a year ago, as favorable impacts from the unlocking
of interest rate and other actuarial assumptions more than offset higher
commission and general expense levels compared to the same period of 2021.
We recognize that assets under management, capital appreciation and investment income are integral to evaluating the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and investment gains or losses from life-insurance-related invested assets, the life insurance company reported net income of$21 million and$52 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with$11 million and$35 million for the three and nine months endedSeptember 30, 2021 . The life insurance company portfolio had net after-tax investment losses of less than$1 million for the three and nine months endedSeptember 30, 2022 , compared with net after-tax investment gains of$3 million and$6 million for the three and nine months endedSeptember 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 8% for the third quarter and 9% for the first nine months of 2022, compared with the same periods of 2021. Interest income increased by$8 million and$20 million for the three and nine months endedSeptember 30, 2022 , as net purchases of fixed-maturity securities in recent quarters and rising bond yields are working to generally offset effects of the low interest rate environment of the past several years. Higher dividend income reflected dividend rates that are increasing more slowly, minor asset allocation adjustments in our equity portfolio and net purchases of equity securities in recent quarters, helping dividend income to grow by$5 million and$24 million for the three and nine months endedSeptember 30, 2022 . Investments Results (Dollars in millions) Three months ended September 30, Nine months ended September 30, 2022 2021 % Change 2022 2021 % Change Total investment income, net of expenses$ 193 $ 179 8$ 573 $ 528 9 Investment interest credited to contract holders (27) (26) (4) (82) (79) (4) Investment gains and losses, net (674) (70) nm (2,494) 954 nm
Investments profit (loss), pretax
nm$ (2,003) $ 1,403 nm Cincinnati Financial Corporation Third-Quarter 2022 10-Q Page 52
-------------------------------------------------------------------------------- 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 September 30, 2022 % Yield redemptions Fixed-maturity pretax yield profile: Expected to mature during the remainder of 2022 3.32 % $ 142 Expected to mature during 2023 3.76 809 Expected to mature during 2024 4.30 1,028 Average yield and total expected maturities from the remainder of 2022 through 2024 4.01$ 1,979 The table below shows the average pretax yield-to-amortized cost for fixed-maturity securities acquired during the periods indicated. The average yield for total fixed-maturity securities acquired during the first nine months of 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 nine 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 September 30, Nine months ended September 30, 2022 2021 2022 2021 Average pretax yield-to-amortized cost on new fixed-maturities: Acquired taxable fixed-maturities 5.70 % 3.46 % 4.82 % 3.49 % Acquired tax-exempt fixed-maturities 4.32 2.83 3.85 2.70 Average total fixed-maturities acquired 5.39 3.43 4.62 3.46 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. Cincinnati Financial Corporation Third-Quarter 2022 10-Q Page 53 -------------------------------------------------------------------------------- The table below provides details about investment income. Average yields in this table are based on the average invested asset and cash amounts indicated in the table, using fixed-maturity securities valued at amortized cost and all other securities at fair value. (Dollars in millions) Three months ended September 30, Nine months ended September 30, 2022 2021 % Change 2022 2021 % Change Investment income: Interest$ 129 $ 121 7$ 376 $ 356 6 Dividends 66 61 8 203 179 13 Other 3 1 200 6 4 50 Less investment expenses 5 4 25 12 11 9 Investment income, pretax 193 179 8 573 528 9 Less income taxes 30 28 7 90 82 10 Total investment income, after-tax$ 163 $ 151 8$ 483 $ 446 8 Investment returns: Average invested assets plus cash and cash equivalents$ 23,323 $ 23,263 $ 24,081 $ 22,420 Average yield pretax 3.31 % 3.08 % 3.17 % 3.14 % Average yield after-tax 2.80 2.60 2.67 2.65 Effective tax rate 15.8 15.6 15.8 15.5 Fixed-maturity returns: Average amortized cost$ 12,655 $ 11,931 $ 12,521 $ 11,673 Average yield pretax 4.08 % 4.06 % 4.00 % 4.07 % Average yield after-tax 3.38 3.37 3.32 3.38 Effective tax rate 17.1 16.9 17.1 16.8
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.
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The table below summarizes total investment gains and losses, before taxes.
(Dollars in millions) Three months ended
September
30, Nine months ended September 30,
2022 2021 2022 2021
Investment gains and losses:
Equity securities:
Investment gains and losses on securities
sold, net $ 16 $ (1) $ 34 $ 6
Unrealized gains and losses on securities
still held, net (705) (104) (2,568) 869
Subtotal (689) (105) (2,534) 875
Fixed maturities:
Gross realized gains - 10 6 24
Gross realized losses - (1) (3) (3)
Write-down of impaired securities - (1) - (1)
Subtotal - 8 3 20
Other 15 27 37 59
Total investment gains and losses reported
in net income (674) (70) (2,494) 954
Change in unrealized investment gains and
losses:
Fixed maturities (514) (88) (1,870) (152)
Total $ (1,188) $ (158) $ (4,364) $ 802
Of the 4,495 fixed-maturity securities in the portfolio, 118 securities were
trading below 70% of amortized cost at September 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 nine months of 2022. We had five fixed-maturity securities
written down to fair value due to an intention to be sold, as disclosed in the
table below, and no allowance for credit losses for the first nine months
of 2021.
(Dollars in millions) Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Fixed maturities:
Municipal $ - $ 1 $ - $ 1
Total fixed maturities $ - $ 1 $ - $ 1
Cincinnati Financial Corporation Third-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 nine 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$93 million and$17 million , respectively. Total expenses for Other increased for the first nine months of 2022, primarily due to loss and loss expenses and also underwriting expenses from Cincinnati Re and Cincinnati Global. Other profit in the table below represents profit or losses before income taxes. For all periods shown, total other loss was driven by a combination of underwriting loss in aggregate from Cincinnati Re and Cincinnati Global plus interest expense from debt of the parent company. (Dollars in millions) Three months ended September 30, Nine months ended September 30, 2022 2021 % Change 2022 2021 % Change Interest and fees on loans and leases$ 2 $ 2 0$ 5 $ 5 0 Earned premiums 225 173 30 533 423 26 Other revenues - 1 (100) 2 3 (33) Total revenues 227 176 29 540 431 25 Interest expense 14 13 8 40 39 3 Loss and loss expenses 228 186 23 394 325 21 Underwriting expenses 65 45 44 159 121 31 Operating expenses 4 5 (20) 13 14 (7) Total expenses 311 249 25 606 499 21 Total other loss$ (84) $ (73) (15)$ (66) $ (68) 3 TAXES We had$161 million and$481 million of income tax benefit for the three and nine months endedSeptember 30, 2022 , compared with$31 million and$348 million of income tax expense for the same periods of 2021. The effective tax rate for the three and nine months endedSeptember 30, 2022 , was 27.8% and 24.3% compared with 16.8% and 19.1% 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, changes in underwriting income and a$34 million release of our unrecognized tax benefit. 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 Third-Quarter 2022 10-Q Page 56 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
AtSeptember 30, 2022 , shareholders' equity was$9.431 billion , compared with$13.105 billion atDecember 31, 2021 . Total debt was$833 million atSeptember 30, 2022 , down$10 million fromDecember 31, 2021 . AtSeptember 30, 2022 , cash and cash equivalents totaled$1.083 billion , compared with$1.139 billion atDecember 31, 2021 . The pandemic did not have a significant effect on our cash flows for the first nine months of 2022. In addition to our historically positive operating cash flow to meet the needs of operations, we have the ability to slow investing activities or sell a portion of our high-quality, liquid investment portfolio if such need arises. We also have additional capacity to borrow on our revolving short-term line of credit, as described further below.
SOURCES OF LIQUIDITY
Subsidiary Dividends
Our lead insurance subsidiary declared dividends of$504 million to the parent company in the first nine months of 2022, compared with$358 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 September 30, Nine months ended September 30,
2022 2021 % Change 2022 2021 % Change
Premiums collected $ 1,818 $ 1,634 11 $ 5,295 $ 4,725 12
Loss and loss expenses paid (948) (765) (24) (2,730) (2,237) (22)
Commissions and other underwriting
expenses paid (474) (430) (10) (1,674) (1,434) (17)
Cash flow from underwriting 396 439 (10) 891 1,054 (15)
Investment income received 128 125 2 394 366 8
Cash flow from operations $ 524 $ 564 (7) $ 1,285 $ 1,420 (10)
Collected premiums for property casualty insurance rose $570 million during the
first nine months of 2022, compared with the same period in 2021. Loss and loss
expenses paid for the 2022 period increased $493 million . Commissions and other
underwriting expenses paid increased $240 million .
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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
AtSeptember 30, 2022 , our debt-to-total-capital ratio was 8.1%, 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. AtSeptember 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 atSeptember 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 atSeptember 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 nine 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$1.105 billion in the first nine months of 2022. Commission payments generally track with written premiums, except for annual profit-sharing commissions typically paid during the first quarter of the year.
•Other underwriting expenses - Many of our underwriting expenses are not
contractual obligations, but reflect the ongoing expenses of our business.
Noncommission underwriting expenses paid were
months of 2022.
There were no contributions to our qualified pension plan during the first nine
months of 2022.
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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 and shares acquired under our repurchase program. 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 nine months of 2022, we used$316 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 atSeptember 30, 2022 , increased$816 million compared withDecember 31, 2021 . Case loss reserves increased by$171 million , IBNR loss reserves increased by$576 million and loss expense reserves increased by$69 million . The total gross increase was primarily due to our commercial casualty line of business, our excess and surplus lines insurance segment and also Cincinnati Re and Cincinnati Global. Cincinnati Financial Corporation Third-Quarter 2022 10-Q Page 59 --------------------------------------------------------------------------------
Property Casualty Gross Reserves
(Dollars in millions) Loss
reserves
Case IBNR Loss expense Total gross Percent of
At September 30, 2022 reserves reserves reserves reserves total
Commercial lines insurance:
Commercial casualty $ 1,135 $ 863 $ 715 $ 2,713 33.7 %
Commercial property 326 118 78 522 6.5
Commercial auto 433 261 127 821 10.2
Workers' compensation 439 520 83 1,042 13.0
Other commercial 97 14 127 238 3.0
Subtotal 2,430 1,776 1,130 5,336 66.4
Personal lines insurance:
Personal auto 217 94 62 373 4.6
Homeowner 189 105 47 341 4.3
Other personal 89 92 5 186 2.3
Subtotal 495 291 114 900 11.2
Excess and surplus lines 296 224 183 703 8.7
Cincinnati Re 141 639 4 784 9.7
Cincinnati Global 140 179 3 322 4.0
Total $ 3,502 $ 3,109 $ 1,434 $ 8,045 100.0 %
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$3.053 billion atSeptember 30, 2022 , compared with$3.014 billion at year-end 2021, reflecting 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 Third-Quarter 2022 10-Q Page 60 --------------------------------------------------------------------------------
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.
Cincinnati Financial Reports Third-Quarter 2022 Results
American Equity Recognized for Award-Winning Customer Satisfaction Among Annuity Providers in the U.S. by J.D. Power
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