CINCINNATI FINANCIAL CORPORATION 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 2019 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 2019 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 35. Factors that could cause or contribute to such differences include, but are not limited to: •Effects of the COVID-19 pandemic that could affect results for reasons such as: •Securities market disruption or volatility and related effects such as decreased economic activity that affect the company's investment portfolio and book value •An unusually high level of claims in our insurance or reinsurance operations that increase litigation-related expenses •An unusually high level of insurance losses, including risk of legislation or court decisions extending business interruption insurance to require coverage when there was no direct physical damage or loss to property •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 •Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes •Increased frequency and/or severity of claims or development of claims that are unforeseen at the time of policy issuance •Inadequate estimates, assumptions or reliance on third-party data used for critical accounting estimates •Declines in overall stock market values negatively affecting the company's equity portfolio and book value •Prolonged low interest rate environment or other factors that limit the company's ability to generate growth in investment income or interest rate fluctuations that result in declining values of fixed-maturity investments, including declines in accounts in which we hold bank-owned life insurance contract assets •Domestic and global events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic instability or recession, that lead to: •Significant or prolonged decline in the fair value of a particular security or group of securities and impairment of the asset(s) •Significant decline in investment income due to reduced or eliminated dividend payouts from a particular security or group of securities •Significant rise in losses from surety and director and officer policies written for financial institutions or other insured entities •Our inability to integrate Cincinnati Global and its subsidiaries into our on-going operations, or disruptions to our on-going operations due to such integration •Recession or other economic conditions resulting in lower demand for insurance products or increased payment delinquencies •Difficulties with technology or data security breaches, including cyberattacks, that could negatively affect our ability to conduct business; disrupt our relationships with agents, policyholders and others; cause Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 27 -------------------------------------------------------------------------------- reputational damage, mitigation expenses and data loss and expose us to liability under federal and state laws •Disruption of the insurance market caused by technology innovations such as driverless cars that could decrease consumer demand for insurance products •Delays, inadequate data developed internally or from third parties, or performance inadequacies from ongoing development and implementation of underwriting and pricing methods, including telematics and other usage-based insurance methods, or technology projects and enhancements expected to increase our pricing accuracy, underwriting profit and competitiveness •Increased competition that could result in a significant reduction in the company's premium volume •Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could alter our competitive advantages •Inability to obtain adequate ceded reinsurance on acceptable terms, amount of reinsurance coverage purchased, financial strength of reinsurers and the potential for nonpayment or delay in payment by reinsurers •Inability to defer policy acquisition costs for any business segment if pricing and loss trends would lead management to conclude that segment could not achieve sustainable profitability •Inability of our subsidiaries to pay dividends consistent with current or past levels •Events or conditions that could weaken or harm the company's relationships with its independent agencies and hamper opportunities to add new agencies, resulting in limitations on the company's opportunities for growth, such as: •Downgrades of the company's financial strength ratings •Concerns that doing business with the company is too difficult •Perceptions that the company's level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace •Inability or unwillingness to nimbly develop and introduce coverage product updates and innovations that our competitors offer and consumers expect to find in the marketplace •Actions of insurance departments, state attorneys general or other regulatory agencies, including a change to a federal system of regulation from a state-based system, that: •Impose new obligations on us that increase our expenses or change the assumptions underlying our critical accounting estimates •Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations •Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business •Add assessments for guaranty funds, other insurance-related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes •Increase our provision for federal income taxes due to changes in tax law •Increase our other expenses •Limit our ability to set fair, adequate and reasonable rates •Place us at a disadvantage in the marketplace •Restrict our ability to execute our business model, including the way we compensate agents •Adverse outcomes from litigation or administrative proceedings •Events or actions, including unauthorized intentional circumvention of controls, that reduce the company's future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002 •Unforeseen departure of certain executive officers or other key employees due to retirement, health or other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of certain longstanding relationships with insurance agents and others •Events, such as an epidemic, natural catastrophe or terrorism, that could hamper our ability to assemble our workforce at our headquarters location Further, the company's insurance businesses are subject to the effects of changing social, global, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain. Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 28 -------------------------------------------------------------------------------- CORPORATE FINANCIAL HIGHLIGHTS Net Income and Comprehensive Income Data (Dollars in millions, except per share data) Three months ended June 30, Six months ended June 30, 2020 2019 % Change 2020 2019 % Change Earned premiums$ 1,482 $ 1,384 7$ 2,938 $ 2,717 8 Investment income, net of expenses (pretax) 166 160 4 331 317 4 Investment gains and losses, net (pretax) 1,060 364 191 (665) 1,027 nm Total revenues 2,714 1,913 42 2,615 4,072 (36) Net income (loss) 909 428 112 (317) 1,123 nm Comprehensive income (loss) 1,302 582 124 (168) 1,465 nm Net income (loss) per share-diluted 5.63 2.59 117 (1.96) 6.81
nm
Cash dividends declared per share 0.60 0.56 7 1.20 1.12 7 Diluted weighted average shares outstanding 161.5 165.2 (2) 161.5 164.9 (2) Total revenues rose 42% for the second quarter of 2020, compared with the same period of 2019, primarily due to increases in net investment gains and earned premiums. For the first six months of 2020, compared with the first six months of 2019, total revenues decreased$1.457 billion , as higher earned premiums were offset by net investment losses. Premium and investment revenue trends are discussed further in the respective sections of Financial Results. Investment gains and losses are recognized on the sales of investments, on certain changes in fair values of securities even though we continue to hold the securities or as otherwise required by GAAP. We have substantial discretion in the timing of investment sales, and that timing generally is independent of the insurance underwriting process. The change in fair value of securities is also generally independent of the insurance underwriting process. Net income for the second quarter of 2020, compared with second-quarter 2019, increased$481 million , including increases of$550 million in after-tax net investment gains and$6 million in after-tax investment income, partially offset by a$70 million decrease in after-tax property casualty underwriting income. Second-quarter 2020 catastrophe losses, mostly weather related, were$79 million higher after taxes and unfavorably affected both net income and property casualty underwriting income. Life insurance segment results on a pretax basis improved$3 million compared with second-quarter 2019. For the first six months of 2020, net income decreased$1.440 billion , compared with the same period of 2019, including decreases of$1.336 billion in after-tax investment gains and losses and$123 million in after-tax property casualty underwriting income, partially offset by a$12 million improvement in after-tax investment income. The property casualty underwriting income decrease included an unfavorable$120 million after-tax effect from higher catastrophe losses. Life insurance segment results improved by$6 million on a pretax basis. During much of the first six months of 2020, the novel coronavirus (SARS-CoV-2 or COVID-19), recognized as a pandemic by theWorld Health Organization , caused significant economic effects where we operate, including temporary closures of many businesses and reduced consumer spending due to shelter-in-place, stay-at-home and other governmental actions. Those orders and the uncertainty surrounding COVID-19 had broad financial market effects and caused significant market disruption and volatility. The stock market volatility was a major contributor to the six-month revenue decrease and net loss effects discussed above, and below in this quarterly report Item 2, Investments Results, that resulted from a reduction in net investment gains for our investment portfolio. The health and safety of our associates, agents and policyholders is at the top of company priorities. As stay-at-home actions were enacted, we promptly and effectively transitioned most of our headquarters associates to working from home. We provided the technology necessary to keep the business running, as associates continued writing and collecting insurance premiums, processing claims and performing other operational functions. They joined our field associates that already worked from home, providing agents and policyholders with outstanding service. At the end of the second quarter of 2020, nearly all of our associates continued to work from home. Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 29 -------------------------------------------------------------------------------- The COVID-19 pandemic slowed the growth of our premium revenues for the second quarter and first six months of 2020, including new business written premiums. Premium growth by segment is discussed below in Financial Results. For future periods, renewal premium or new business premium amounts could further decline if the basis for policy premiums, such as sales and payrolls of businesses we insure, decrease as a result of the pandemic and a weakened economy. In addition, the ultimate effects of recent or future government-ordered moratoriums or deferral of premium payments related to our insurance policies are uncertain and may further adversely affect premium growth. We are not able to determine premium effects for future periods. During the second quarter of 2020, our estimates for incurred losses and expenses included approximately$65 million related to the pandemic. The total included$19 million for legal expenses in defense of business interruption claims,$15 million for Cincinnati Re® losses,$9 million for Cincinnati Global Underwriting Ltd.SM (Cincinnati Global) losses,$6 million for credit losses related to uncollectible premiums and$16 million for the previously announced Stay-at-Home policyholder credit for personal auto policies. Approximately half of the losses for Cincinnati Re represent its estimated share from reinsurance treaties with companies that provided affirmative coverage for pandemic-related business interruption, and most of the remainder is an estimated share of treaties covering professional liability. Most of the losses for Cincinnati Global represent its share of potential losses from business interruption coverage for large risks with customized policy terms and conditions. Loss experience for our insurance operations is influenced by many factors, as discussed in our 2019 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Reserves, Page 56. Because of various factors that affect exposure to certain insurance losses, such as less miles driven for vehicles or reduced sales and payrolls for businesses, there could be a reduction in future losses, and in some cases a generally corresponding reduction in premiums. Also, there could be losses or legal expenses that increase or otherwise occur independently of changes in sales or payrolls of businesses we insure. We are not able to determine loss effects for future periods. Performance by segment is discussed below in Financial Results. As discussed in our 2019 Annual Report on Form 10-K, Item 7, Factors Influencing Our Future Performance, Page 55, there are several reasons why our performance during 2020 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 2019, the company had increased the annual cash dividend rate for 59 consecutive years, a record we believe is matched by only seven other publicly traded companies. InJanuary 2020 , the board of directors increased the regular quarterly dividend to60 cents per share, setting the stage for our 60th consecutive year of increasing cash dividends. During the first six months of 2020, cash dividends declared by the company increased 7% compared with the same period of 2019. Our board regularly evaluates relevant factors in decisions related to dividends and share repurchases. The 2020 dividend increase reflected our strong earnings performance and signaled management's and the board's positive outlook and confidence in our outstanding capital, liquidity and financial flexibility. Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 30 -------------------------------------------------------------------------------- Balance Sheet Data and Performance Measures (Dollars in millions, except share data) At June 30, At December 31, 2020 2019 Total investments$ 19,487 $ 19,746 Total assets 25,450 25,408 Short-term debt 122 39 Long-term debt 788 788 Shareholders' equity 9,258 9,864 Book value per share 57.56 60.55 Debt-to-total-capital ratio 8.9 %
7.7 %
Total assets atJune 30, 2020 , increased by less than 1% compared with year-end 2019, and included a 1% decrease in total investments that reflected lower fair values for many securities in our portfolio. Shareholders' equity decreased 6% and book value per share decreased 5% during the first six months of 2020. Our debt-to-total-capital ratio (capital is the sum of debt plus shareholders' equity) increased compared with year-end 2019. Our value creation ratio is our primary performance metric. That ratio was negative 3.0% for the first six months of 2020, and was significantly lower than the same period in 2019, primarily due to a reduction of overall net gains from our investment portfolio. The$2.99 decrease in book value per share during the first six months of 2020 contributed negative 5.0 percentage points to the value creation ratio, while dividends declared at$1.20 per share contributed positive 2.0 points. Value creation ratios by major components and in total, along with calculations from per-share amounts, are shown in the tables below. Six months ended June Three months ended June 30, 30, 2020 2019 2020 2019 Value creation ratio major components: Net income before investment gains 0.9 % 1.6 % 2.1 % 4.0 % Change in fixed-maturity securities, realized and unrealized gains 5.0 1.8 0.8 4.4 Change in equity securities, investment gains 10.5 3.4 (4.7) 10.3 Other (0.1) 0.0 (1.2) (0.1) Value creation ratio 16.3 % 6.8 % (3.0) % 18.6 % Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 31 --------------------------------------------------------------------------------
Six months ended June
(Dollars are per share) Three months ended June 30, 30,
2020 2019 2020 2019
Value creation ratio:
End of period book value* $ 57.56 $ 55.92 $ 57.56 $ 55.92
Less beginning of period book value 50.02 52.88 60.55 48.10
Change in book value 7.54 3.04 (2.99) 7.82
Dividend declared to shareholders 0.60 0.56 1.20 1.12
Total value creation $ 8.14 $
3.60
Value creation ratio from change in book value** 15.1 % 5.7 % (5.0) % 16.3 % Value creation ratio from dividends declared to shareholders*** 1.2 1.1 2.0 2.3 Value creation ratio 16.3 % 6.8 % (3.0) % 18.6 %
* Book value per share is calculated by dividing end of period total shareholders' equity by end of period shares outstanding
** Change in book value divided by the beginning of period book value *** Dividend declared to shareholders divided by beginning of period book value
DRIVERS OF LONG-TERM VALUE CREATION Operating through TheCincinnati Insurance Company ,Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on 2019 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 2019 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. AtJune 30, 2020 , we actively marketed through agencies located in 45 states. We maintain a long-term perspective that guides us in addressing immediate challenges or opportunities while focusing on the major decisions that best position our company for success through all market cycles. To measure our long-term progress in creating shareholder value, our value creation ratio is our primary financial performance target. As discussed in our 2019 Annual Report on Form 10-K, Item 7, Executive Summary, Page 51, management believes this measure is a meaningful indicator of our long-term progress in creating shareholder value and has three primary performance drivers: •Premium growth - We believe our agency relationships and initiatives can lead to a property casualty written premium growth rate over any five-year period that exceeds the industry average. For the first six months of 2020, our consolidated property casualty net written premium year-over-year growth was 8%. As ofMarch 2020 ,A.M. Best projected the industry's full-year 2020 written premium growth at approximately 4%. For the five-year period 2015 through 2019, our growth rate exceeded that of the industry. The industry's growth rate excludes its mortgage and financial guaranty lines of business. •Combined ratio - We believe our underwriting philosophy and initiatives can generate a GAAP combined ratio over any five-year period that is consistently within the range of 95% to 100%. For the first six months of 2020, our GAAP combined ratio was 100.8%, including 13.2 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 98.7% for the first six months of 2020. As ofMarch 2020 ,A.M. Best projected the industry's full-year 2020 statutory combined ratio at approximately 99%, including approximately 5 percentage points of catastrophe losses and a favorable effect of approximately 1 percentage point of loss reserve development on prior accident years. The industry's ratio again excludes its mortgage and financial guaranty lines of business. •Investment contribution - We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year return of theStandard & Poor's 500 Index. For the first six months of 2020, pretax investment income was$331 million , up 4% compared with the same period in 2019. We believe our investment portfolio mix provides an appropriate balance of income stability and growth with capital appreciation potential. Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 32 -------------------------------------------------------------------------------- Highlights of Our Strategy and Supporting Initiatives Management has worked to identify a strategy that can lead to long-term success, with concurrence by the board of directors. Our strategy is intended to position us to compete successfully in the markets we have targeted while appropriately managing risk. Further description of our long-term, proven strategy can be found in our 2019 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. We believe successful implementation of initiatives that support our strategy will help us better serve our agent customers and reduce volatility in our financial results while we also grow earnings and book value over the long term, successfully navigating challenging economic, market or industry pricing cycles. •Manage insurance profitability - Implementation of these initiatives is intended to enhance underwriting expertise and knowledge, thereby increasing our ability to manage our business while also gaining efficiency. Better profit margins can arise from additional information and more focused action on underperforming product lines, plus pricing capabilities we are expanding through the use of technology and analytics. In addition to enhancing company efficiency, improving internal processes also supports the ability of the independent agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses. We continue to enhance our property casualty underwriting expertise and to effectively and efficiently underwrite individual policies and process transactions. Ongoing initiatives supporting this work include expanding our pricing and segmentation capabilities through experience and use of predictive analytics and additional data. Our segmentation efforts emphasize identification and retention of insurance policies we believe have relatively stronger pricing, while seeking more aggressive renewal terms and conditions on policies we believe have relatively weaker pricing. In 2020, we are continuing to improve underwriting and rate adequacy for our commercial auto and homeowner lines of business. Our commercial auto policies that renewed during the first six months of 2020 experienced an estimated average price increase at percentages in the high-single-digit range, and our homeowner policies that renewed during that period averaged an estimated price increase at percentages in the mid-single-digit range. •Drive premium growth - Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Premium growth initiatives also include expansion of Cincinnati Re, our reinsurance assumed operation, and successful integration of Cincinnati Global, ourLondon -based global specialty underwriter for Lloyd's Syndicate 318. Diversified growth also may reduce variability of losses from weather-related catastrophes. We continue to appoint new agencies to develop additional points of distribution. In 2020, we are planning approximately 125 appointments of independent agencies that offer most or all of our property casualty insurance products. During the first six months of 2020, we appointed 72 new agencies that meet that criteria. We also plan to appoint additional agencies that focus on high net worth personal lines clients. In 2020, we are targeting the appointment of approximately 35 agencies that market only personal lines products for us. During the first six months of 2020, we appointed 23 new agencies that meet that criteria. As ofJune 30, 2020 , a total of 1,831 agency relationships market our property casualty insurance products from 2,530 reporting locations. The totals do not include Lloyd's brokers or coverholders that source business forCincinnati Global. We also continue to grow premiums through the disciplined expansion of Cincinnati Re and the acquisition of Cincinnati Global. During the first six months of 2020, Cincinnati Re contributed$32 million of growth in consolidated property casualty insurance net written premiums while Cincinnati Global contributed$25 million . We also believe that over time Cincinnati Global will provide opportunities to support business produced by our independent agencies in new geographies and lines of business. Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 33 -------------------------------------------------------------------------------- Financial Strength An important part of our long-term strategy is financial strength, which is described in our 2019 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 2019 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, 2020 Reinsurance Ceded Programs, Page 109. Another aspect of our financial strength is our investment portfolio, which remains well-diversified as discussed in this quarterly report in Item 3, Quantitative and Qualitative Disclosures About Market Risk. Our strong parent-company liquidity and financial strength increase our flexibility to maintain a cash dividend through all periods and to continue to invest in and expand our insurance operations. AtJune 30, 2020 , we held$3.171 billion of our cash and invested assets at the parent-company level, of which$2.981 billion , or 94.0%, was invested in common stocks, and$35 million , or 1.1%, was cash or cash equivalents. Our debt-to-total-capital ratio was 8.9% atJune 30, 2020 . Another important indicator of financial strength is our ratio of property casualty net written premiums to statutory surplus, which was 1.1-to-1 for the 12 months endedJune 30, 2020 , compared with 1.0-to-1 at year-end 2019. Financial strength ratings assigned to us by independent rating firms also are important. In addition to rating our parent company's senior debt, four firms award insurer financial strength ratings to one or more of our insurance subsidiary companies based on their quantitative and qualitative analyses. These ratings primarily assess an insurer's ability to meet financial obligations to policyholders and do not necessarily address all of the matters that may be important to investors. Ratings are under continuous review and subject to change or withdrawal at any time by the rating agency. Each rating should be evaluated independently of any other rating; please see each rating agency's website for its most recent report on our ratings.
At
Insurer Financial Strength Ratings
Rating Life insurance
agency Standard market property casualty insurance subsidiaries subsidiary Excess and surplus lines insurance subsidiary Outlook
Rating Rating Rating
tier tier tier
A.M. Best Co. A+ Superior 2 of 16 A+ Superior 2 of 16 A+ Superior 2 of 16 Stable
ambest.com
Fitch Ratings A+ Strong 5 of 21 A+ Strong 5 of 21 - - - Stable
fitchratings.com
Moody's Investors Service A1 Good 5 of 21 - - - - - - Stable
moodys.com
S&P Global Ratings A+ Strong 5 of 21 A+ Strong 5 of 21 - - - Stable
spratings.com
Cincinnati Financial Corporation Second-Quarter 2020 10-Q
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CONSOLIDATED PROPERTY CASUALTY INSURANCE HIGHLIGHTS
Consolidated property casualty insurance results include premiums and expenses
for our standard market insurance segments (commercial lines and personal
lines), our excess and surplus lines segment, Cincinnati Re and our London -based
global specialty underwriter Cincinnati Global.
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
Earned premiums $ 1,403 $ 1,317 7 $ 2,792 $ 2,584 8
Fee revenues 2 2 0 5 5 0
Total revenues 1,405 1,319 7 2,797 2,589 8
Loss and loss expenses from:
Current accident year before
catastrophe losses 817 802 2 1,649 1,588 4
Current accident year catastrophe
losses 237 145 63 368 216 70
Prior accident years before
catastrophe losses (41) (69) 41 (69) (139) 50
Prior accident years catastrophe
losses (6) (15) 60 (11) (12) 8
Loss and loss expenses 1,007 863 17 1,937 1,653 17
Underwriting expenses 439 408 8 877 797 10
Underwriting profit (loss) $ (41) $ 48 nm $ (17) $ 139 nm
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year before catastrophe losses 58.2 % 60.9 % (2.7) 59.0 % 61.5 %
(2.5)
Current accident year catastrophe
losses 16.9 11.1 5.8 13.2 8.4 4.8
Prior accident years before
catastrophe losses (2.9) (5.3) 2.4 (2.4) (5.4) 3.0
Prior accident years catastrophe
losses (0.4) (1.1) 0.7 (0.4) (0.5) 0.1
Loss and loss expenses 71.8 65.6 6.2 69.4 64.0 5.4
Underwriting expenses 31.3 30.9 0.4 31.4 30.8 0.6
Combined ratio 103.1 % 96.5 % 6.6 100.8 % 94.8 % 6.0
Combined ratio 103.1 % 96.5 % 6.6 100.8 % 94.8 % 6.0
Contribution from catastrophe losses
and prior
years reserve development 13.6 4.7 8.9 10.4 2.5 7.9
Combined ratio before catastrophe
losses and
prior years reserve development 89.5 % 91.8 % (2.3) 90.4 % 92.3 % (1.9)
The COVID-19 pandemic slowed the rate of our premium growth for the second
quarter and first six months of 2020. Consolidated property casualty net written
premiums grew 6% during second-quarter 2020, following growth of 10% for both
the first quarter of 2020 and full-year 2019. For the first six months of 2020,
net written premiums grew 8%, compared with 10% for the first half of 2019. New
business written premiums for the second quarter of 2020 decreased compared with
the same period a year ago, and was largely responsible for the slowed growth in
net written premiums.
New business written premiums decreased 1% for second-quarter 2020, compared
with second-quarter 2019, reflecting a reduction in submissions from agents for
us to quote premiums for policies during the first half of the quarter. During
the second half of the quarter, as government restrictions eased and businesses
reopened, submission counts were higher than the same period in 2019. For
policies that renewed during the second quarter of 2020, higher average pricing
offset some of the decrease in new business written premiums and reduced insured
exposure levels that affected some lines of business. Regardless of future
policy submission volume and pricing changes, new business and renewal premium
amounts could decline if the exposure basis for policy premiums, such as sales
and payrolls of businesses we insure, decrease as a result of a weakened
economy. We are not able to determine other effects of the pandemic on future
periods.
Loss experience for our insurance operations is influenced by many factors as
discussed in further detail in Financial Results by property casualty
insurance segment. Consolidated property casualty paid losses before catastrophe
effects for the second quarter of 2020, as a ratio to earned premiums, were 11.0
percentage points
Cincinnati Financial Corporation Second-Quarter 2020 10-Q
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lower than the same period a year ago, in part due to reduced business activity
and fewer vehicles on the road that reflected pandemic effects. Case incurred
losses before catastrophe effects were 12.7 points lower but were mostly offset
by reserves for incurred but not reported (IBNR) losses that increased by 11.1
points. For the first six months of 2020, compared with a year ago, ratios
before catastrophe effects included: 8.3 percentage points lower for paid
losses, 7.2 points lower for case incurred losses and 6.5 points higher for IBNR
losses. For future periods, factors that reduce exposure to certain insurance
losses, such as fewer vehicular miles driven or reduced sales and payrolls for
businesses, could cause a reduction in future losses that generally correspond
to reduced premiums. However, there could be losses or legal expenses that occur
independent of changes in mileage, sales or payrolls of businesses we insure. We
are not able to determine premium or loss effects for future periods.
Our consolidated property casualty insurance operations generated an
underwriting loss of $41 million for the second quarter of 2020 and $17 million
for the first six months of 2020. The decreases of $89 million and $156 million ,
respectively, compared with the same periods of 2019, included unfavorable
increases of $101 million and $153 million in losses from catastrophes, mostly
caused by severe weather. We believe future property casualty underwriting
results will continue to benefit from price increases and our ongoing
initiatives to improve pricing precision and loss experience related to claims
and loss control practices.
For all property casualty lines of business in aggregate, net loss and loss
expense reserves at June 30, 2020 , were $369 million higher, or 6%, than at
year-end 2019, including an increase of $310 million for the IBNR portion.
We measure and analyze property casualty underwriting results primarily by the
combined ratio and its component ratios. The GAAP-basis combined ratio is the
percentage of incurred losses plus all expenses per each earned premium dollar -
the lower the ratio, the better the performance. An underwriting profit results
when the combined ratio is below 100%. A combined ratio above 100% indicates
that an insurance company's losses and expenses exceeded premiums.
Our consolidated property casualty combined ratio for the second quarter of 2020
increased by 6.6 percentage points, compared with the same period of 2019,
including an increase of 6.5 points from higher catastrophe losses and loss
expenses. For the first six months of 2020, compared with the 2019 six-month
period, our combined ratio increased by 6.0 percentage points, including an
increase of 4.9 points from higher catastrophe losses and loss expenses.
The combined ratio can be affected significantly by natural catastrophe losses
and other large losses as discussed in detail below. The combined ratio can also
be affected by updated estimates of loss and loss expense reserves established
for claims that occurred in prior periods, referred to as prior accident years.
Net favorable development on prior accident year reserves, including reserves
for catastrophe losses, benefited the combined ratio by 2.8 percentage points in
the first six months of 2020, compared with 5.9 percentage points in the same
period of 2019. Net favorable development is discussed in further detail in
Financial Results by property casualty insurance segment.
The ratio for current accident year loss and loss expenses before catastrophe
losses improved in the first six months of 2020. That 59.0% ratio was
2.5 percentage points lower, compared with the 61.5% accident year 2019 ratio
measured as of June 30, 2019 , including an increase of 0.4 points in the ratio
for large losses of $1 million or more per claim, discussed below.
The underwriting expense ratio increased for the second quarter and first six
months of 2020, compared with the same periods a year ago. The increase was
primarily due to a Stay-at-Home policyholder credit for personal auto policies
and higher credit losses due to uncollectible premiums, and offset ongoing
expense management efforts and higher earned premiums.
Cincinnati Financial Corporation Second-Quarter 2020 10-Q
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Consolidated Property Casualty Insurance Premiums
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
Agency renewal written premiums $ 1,244 $ 1,186 5 $ 2,442 $ 2,316 5
Agency new business written
premiums 210 212 (1) 425 393 8
Other written premiums 105 78 35 210 148 42
Net written premiums 1,559 1,476 6 3,077 2,857 8
Unearned premium change (156) (159) 2 (285) (273) (4)
Earned premiums $ 1,403 $ 1,317 7 $ 2,792 $ 2,584 8
The trends in net written premiums and earned premiums summarized in the table
above include the effects of price increases. Price change trends that heavily
influence renewal written premium increases or decreases, along with other
premium growth drivers for 2020, are discussed in more detail by segment below
in Financial Results.
Consolidated property casualty net written premiums for the three and six months
ended June 30, 2020 , grew $83 million and $220 million compared with the same
periods of 2019, with growth in each segment in addition to Cincinnati Re and
Cincinnati Global. 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 decreased by
$2 million for the second quarter of 2020 but grew $32 million for the first six
months of the year, compared with the same periods of 2019. The six-month
increase was driven by our commercial lines insurance segment. New agency
appointments during 2019 and 2020 produced a $35 million increase in standard
lines new business for the first six months of 2020 compared with the same
period of 2019. 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 $11 million and $32 million for the three and six months ended June
30, 2020 , compared with the same periods of 2019, to $84 million and $189
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 Re earned premiums were $119 million for the first six months of
2020, compared with $86 million for the same period a year ago.
Cincinnati Global also contributed to the increase in other written premiums,
following our acquisition of it on February 28, 2019 . Net written premiums
increased by $9 million and $25 million for the three and six months ended June
30, 2020 , compared with the second quarter and four-month periods in 2019, to
$53 million and $90 million , respectively. Cincinnati Global earned premiums
were $61 million for the first six months of 2020, compared with $43 million for
the four-month period a year ago.
Other written premiums also include premiums ceded to reinsurers as part of our
reinsurance ceded program. A decrease in ceded premiums increased net written
premiums by $6 million and $4 million for the second quarter and first six
months of 2020, compared with the same periods of 2019.
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 16.5 and 12.8 percentage points to the combined ratio in the second quarter and first six months of 2020, compared with 10.0 and 7.9 percentage points in the same periods of 2019.
EffectiveJune 1, 2020 , we restructured and renewed our combined property catastrophe occurrence excess of loss treaty for a period of one year, commuting the expiring treaty one month in advance of its expiration date. The treaty provides coverage for various combinations of occurrences, has an aggregate limit of$50 million in excess of$150 million per loss and applies to business written on a direct basis and by Cincinnati Re. Cincinnati Global Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 37 --------------------------------------------------------------------------------
catastrophe losses are not applicable to the treaty. Ceded premiums for the
one-year renewal period of coverage from this treaty are estimated to be
approximately
The following table shows consolidated property casualty insurance catastrophe losses and loss expenses incurred, net of reinsurance, as well as the effect of loss development on prior period catastrophe events. We individually list declared catastrophe events for which our incurred losses reached or exceeded$10 million . Consolidated Property Casualty Insurance Catastrophe Losses and Loss Expenses Incurred (Dollars in millions, net of reinsurance) Three months endedJune 30 , Six months endedJune 30 , Comm. Pers. E&S Comm. Pers. E&S Dates Region lines lines lines Other Total lines lines lines Other Total 2020Jan. 10-12 Midwest, Northeast, South $ - $ - $ - $ - $ -$ 6 $ 5 $ - $ -$ 11 Feb. 5-8 Northeast, South (1) (1) - - (2) 10 5 - - 15Mar. 2-4 Midwest, South 1 (2) - 5 4 64 8 - 6 78Mar. 17-20 Midwest, South 1 5 - - 6 2 10 - - 12Mar. 27-30 Midwest, Northeast, South 18 (3) - - 15 24 13 - - 37Apr. 7-9 Midwest, Northeast, South 26 25 - - 51 26 25 - - 51Apr. 10-14 Midwest, Northeast, South 22 27 - - 49 22 27 - - 49May 4-5 Midwest, South 22 5 - - 27 22 5 - -27 May 26 -Jun. 8 Midwest, Northeast, South, West 20 - 1 8 29 20 - 1 8 29 All other 2020 catastrophes 18 36 2 2 58 19 37 2 1 59 Development on 2019 and prior catastrophes (6) - - - (6) (9) (5) - 3 (11) Calendar year incurred total$ 121 $ 92 $ 3 $ 15 $ 231 $ 206 $ 130 $ 3 $ 18 $ 357 2019Jan. 29-Feb. 1 Midwest, Northeast$ (3) $ (1) $ -$ 1 $ (3) $ 11 $ 10 $ -$ 1 $ 22 Feb. 23-26 Midwest, Northeast, South - (2) - - (2) 11 10 - - 21Mar. 12-17 Midwest, Northeast, West, South 1 (1) - 2 2 5 6 - 2 13May 16-17 Midwest 6 6 - - 12 6 6 - - 12May 26-28 Midwest, Northeast, West, South 78 24 - - 102 78 24 - - 102 All other 2019 catastrophes 22 12 - - 34 26 20 - - 46 Development on 2018 and prior catastrophes (8) (3) - (4) (15) (14) 5 - (3) (12) Calendar year incurred total$ 96 $ 35 $ -$ (1) $ 130 $ 123 $ 81 $ - $ -$ 204 Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 38
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The following table includes data for losses incurred of
Consolidated Property Casualty Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance) Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
Current accident year losses greater
than $5 million $ 19 $ 14 36 $ 19 $ 14 36
Current accident year losses $1
million - $5 million 53 53 - 103 90 14
Large loss prior accident year
reserve development 7 5 40 33 21 57
Total large losses incurred 79 72 10 155 125 24
Losses incurred but not reported 134 (14) nm 213 33 nm
Other losses excluding catastrophe losses 409 547 (25) 905 1,039 (13) Catastrophe losses 226 128 77 349 198 76 Total losses incurred$ 848 $ 733 16$ 1,622 $ 1,395 16 Ratios as a percent of earned premiums: Pt. Change Pt. Change Current accident year losses greater than$5 million 1.4 % 1.1 % 0.3 0.7 % 0.5 %
0.2
Current accident year losses$1 million -$5 million 3.7 4.0 (0.3) 3.7 3.5 0.2 Large loss prior accident year reserve development 0.5 0.4 0.1 1.2 0.8 0.4 Total large loss ratio 5.6 5.5 0.1 5.6 4.8 0.8 Losses incurred but not reported 9.6 (1.1) 10.7 7.6 1.3 6.3 Other losses excluding catastrophe losses 29.2 41.6 (12.4) 32.4 40.2 (7.8) Catastrophe losses 16.1 9.7 6.4 12.5 7.7 4.8 Total loss ratio 60.5 % 55.7 % 4.8 58.1 % 54.0 % 4.1 We believe the inherent variability of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the variability in addition to general inflationary trends in loss costs. Our analysis continues to indicate no unexpected concentration of large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The second-quarter 2020 property casualty total large losses incurred of$79 million , net of reinsurance, were slightly lower than the$80 million quarterly average during full-year 2019 but higher than the$72 million experienced for the second quarter of 2019. The ratio for these large losses was 0.1 percentage points higher compared with last year's second quarter. The second-quarter 2020 amount of total large losses incurred contributed to the increase in the six-month 2020 total large loss ratio, compared with 2019, in addition to a first-quarter 2020 ratio that was 1.4 points higher than the first quarter of 2019. We believe results for the three- and six-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above$1 million . Losses by size are discussed in further detail in results of operations by property casualty insurance segment. FINANCIAL RESULTS Consolidated results reflect the operating results of each of our five segments along with the parent company, Cincinnati Re, Cincinnati Global and other activities reported as "Other." The five segments are: •Commercial lines insurance •Personal lines insurance •Excess and surplus lines insurance •Life insurance •Investments Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 39 -------------------------------------------------------------------------------- COMMERCIAL LINES INSURANCE RESULTS (Dollars in millions) Three months ended June 30, Six months ended June 30, 2020 2019 % Change 2020 2019 % Change Earned premiums$ 870 $ 823 6$ 1,733 $ 1,633 6 Fee revenues 1 1 0 2 2 0 Total revenues 871 824 6 1,735 1,635 6 Loss and loss expenses from: Current accident year before catastrophe losses 514 504 2 1,040 1,014 3 Current accident year catastrophe losses 127 104 22 215 137 57 Prior accident years before catastrophe losses (39) (50) 22 (42) (106) 60 Prior accident years catastrophe losses (6) (8) 25 (9) (14) 36 Loss and loss expenses 596 550 8 1,204 1,031 17 Underwriting expenses 267 262 2 543 516 5 Underwriting profit (loss) $ 8$ 12 (33)$ (12) $ 88 nm Ratios as a percent of earned premiums: Pt. Change Pt. Change Current accident year before catastrophe losses 58.9 % 61.2 % (2.3) 60.0 % 62.1 % (2.1) Current accident year catastrophe losses 14.6 12.7 1.9 12.4 8.4 4.0 Prior accident years before catastrophe losses (4.5) (6.1) 1.6 (2.4) (6.5) 4.1 Prior accident years catastrophe losses (0.6) (1.0) 0.4 (0.5) (0.9) 0.4 Loss and loss expenses 68.4 66.8 1.6 69.5 63.1 6.4 Underwriting expenses 30.7 31.8 (1.1) 31.3 31.6 (0.3) Combined ratio 99.1 % 98.6 % 0.5 100.8 % 94.7 % 6.1 Combined ratio 99.1 % 98.6 % 0.5 100.8 % 94.7 % 6.1 Contribution from catastrophe losses and prior years reserve development 9.5 5.6 3.9 9.5 1.0 8.5 Combined ratio before catastrophe losses and prior years reserve development 89.6 % 93.0 % (3.4) 91.3 % 93.7 % (2.4) Overview While earned premiums increased 6% for both the second quarter and first six months of 2020, the COVID-19 pandemic slowed the pace of net written premium growth for our commercial lines insurance segment. Net written premiums grew 3% during second-quarter 2020 and 6% on a six-month basis, compared with the same periods a year ago. The rate of growth for each major line of business was less for the second quarter, compared with the first quarter of 2020, including commercial property down slightly while commercial casualty, commercial auto and workers' compensation each slowed by 6 percentage points or more. New business and renewal premium growth could continue to slow if the basis for policy premiums, such as sales and payrolls of businesses we insure, decrease as a result of a weakened economy. We are not able to determine other effects of the pandemic on future periods. Loss experience for our insurance operations is influenced by many factors, and reinsurance such as our property catastrophe reinsurance treaty helps protect against catastrophic events. Reinsurance is discussed in our 2019 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, 2020 Reinsurance Ceded Programs, Page 109. Aggregation of losses into one event, sometimes referred to as an hours clause, varies by peril. For example, the general provision in our property catastrophe treaty is 168 hours, but it is 120 hours for a wind event and 96 hours for a riot or civil commotion event. The ratio for accident year 2020 loss and loss expenses before catastrophe losses for our commercial lines insurance segment, measured as ofJune 30 , improved by 2.1 percentage points in the first six months of 2020. The improvement was driven by our commercial casualty and commercial auto lines of business, while commercial property improved by less than 1 point and workers' compensation increased by 3.0 points. During the second quarter of 2020, we incurred approximately$19 million for legal expenses in defense of business interruption claims Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 40 -------------------------------------------------------------------------------- for our commercial property line of business, related to the pandemic. The unfavorable change for workers' compensation reflected average percentage price changes that have decreased in the mid-single-digit range for several quarters. For future periods, factors that reduce exposure to certain insurance losses, such as fewer vehicular miles driven or reduced sales and payrolls for businesses, could cause a reduction in future losses that generally correspond to reduced premiums. However, there could be losses or legal expenses that occur independent of changes in mileage, sales or payrolls of businesses we insure. We are not able to determine premium or loss effects for future periods. Performance highlights for the commercial lines segment include: •Premiums - Earned premiums and net written premiums for the commercial lines segment rose during the second quarter and first six months of 2020, compared with the same periods a year ago, primarily due to renewal written premium growth that continued to include higher average pricing. The table below analyzes the primary components of premiums. We continue to use predictive analytics tools to improve pricing precision and segmentation while leveraging our local relationships with agents through the efforts of our teams that work closely with them. We seek to maintain appropriate pricing discipline for both new and renewal business as our agents and underwriters assess account quality to make careful decisions on a case-by-case basis whether to write or renew a policy. Agency renewal written premiums increased by 4% during both the second quarter and first six months of 2020, compared with the same periods of 2019. During the second quarter of 2020, our overall standard commercial lines policies averaged estimated renewal price increases at percentages near the low end of the mid-single-digit range. We continue to segment commercial lines policies, emphasizing identification and retention of policies we believe have relatively stronger pricing. Conversely, we have been seeking stricter renewal terms and conditions on policies we believe have relatively weaker pricing, thus retaining fewer of those policies. We measure average changes in commercial lines renewal pricing as the percentage rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for the respective policies. Our average overall commercial lines renewal pricing change includes the impact of flat pricing for certain coverages within package policies written for a three-year term that were in force but did not expire during the period being measured. Therefore, our reported change in average commercial lines renewal pricing reflects a blend of three-year policies that did not expire and other policies that did expire during the measurement period. For commercial lines policies that did expire and were then renewed during the second quarter of 2020, we estimate that our average percentage price increase for commercial auto was near the low end of the high-single-digit range. The estimated average percentage price change for our commercial property line of business was an increase in the mid-single-digit range and for commercial casualty it was also an increase in the mid-single-digit range, improved compared with 2019. The estimated average percentage price change for workers' compensation was a decrease in the mid-single-digit range. Renewal premiums for certain policies, primarily our commercial casualty and workers' compensation lines of business, include the results of policy audits that adjust initial premium amounts based on differences between estimated and actual sales or payroll related to a specific policy. Audits completed during the first six months of 2020 contributed$32 million to net written premiums. New business written premiums for commercial lines decreased by$3 million for the second quarter, but increased$31 million during the first six months of 2020, compared with the same periods of 2019. The six-month increase reflected a higher level of submissions from our agents requesting our quote for prospective policyholders. During the first half of the second quarter, submission volume was less than a year ago, but during the quarter's second half it was more than last year, as government restrictions eased and businesses reopened. 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, decreased ceded premiums increased net written premiums by$3 million and$2 million for the second quarter and first six months of 2020, compared with the same periods of 2019. Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 41
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Commercial Lines Insurance Premiums
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
Agency renewal written premiums $ 794 $ 767 4 $ 1,636 $ 1,566 4
Agency new business written
premiums 134 137 (2) 288 257 12
Other written premiums (20) (25) 20 (44) (48) 8
Net written premiums 908 879 3 1,880 1,775 6
Unearned premium change (38) (56) 32 (147) (142) (4)
Earned premiums $ 870 $ 823 6 $ 1,733 $ 1,633 6
•Combined ratio - The commercial lines second-quarter 2020 combined ratio
increased by 0.5 percentage points, compared with the same period a year ago,
including an increase of 2.3 points in losses from catastrophes. For the first
six months of 2020, the combined ratio increased by 6.1 percentage points,
compared with the same period a year ago, in part due to an increase of 4.4
points in losses from catastrophes. Underwriting results for both periods
included better loss experience for the current accident year but a lower level
of favorable reserve development on prior accident years.
The current accident year loss and loss expenses before catastrophe losses ratio
for commercial lines improved in the first six months of 2020. That 60.0% ratio
was 2.1 percentage points lower, compared with the 62.1% accident year 2019
ratio measured as of June 30, 2019 , including an increase of 0.7 percentage
points in the ratio for large losses of $1 million or more per claim, discussed
below.
Catastrophe losses and loss expenses accounted for 14.0 and 11.9 percentage
points of the combined ratio for the second quarter and first six months of
2020, compared with 11.7 and 7.5 percentage points for the same periods a year
ago. Through 2019, the 10-year annual average for that catastrophe measure for
the commercial lines segment was 5.2 percentage points, and the five-year annual
average was 5.5 percentage points.
The net effect of reserve development on prior accident years during the second
quarter and first six months of 2020 was favorable for commercial lines overall
by $45 million and $51 million , compared with $58 million and $120 million for
the same periods in 2019. For the first six months of 2020, our commercial
casualty and workers' compensation lines of business accounted for nearly all of
the commercial lines net favorable reserve development on prior accident years,
each representing approximately half of the total. The net favorable reserve
development recognized during the first six months of 2020 for our commercial
lines insurance segment was primarily for accident years 2019 and 2018 and was
primarily due to lower-than-anticipated loss emergence on known claims. Reserve
estimates are inherently uncertain as described in our 2019 Annual Report on
Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance
Loss and Loss Expense Reserves, Page 56.
The commercial lines underwriting expense ratio decreased for the second quarter
and first six months of 2020, compared with the same period a year ago, largely
due to ongoing expense management efforts and higher earned premiums.
Cincinnati Financial Corporation Second-Quarter 2020 10-Q
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Commercial Lines Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance) Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
Current accident year losses greater
than $5 million $ 19 $ 14 36 $ 19 $ 14 36
Current accident year losses $1
million - $5 million 45 41 10 81 68 19
Large loss prior accident year
reserve development 5 3 67 27 16 69
Total large losses incurred 69 58 19 127 98 30
Losses incurred but not reported 72 (7) nm 130 36 261
Other losses excluding catastrophe
losses 233 320 (27) 531 605 (12)
Catastrophe losses 119 94 27 201 119 69
Total losses incurred $ 493 $ 465 6 $ 989 $ 858 15
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year losses greater
than $5 million 2.2 % 1.7 % 0.5 1.1 % 0.9 % 0.2
Current accident year losses $1
million - $5 million 5.1 5.0 0.1 4.6 4.1 0.5
Large loss prior accident year
reserve development 0.6 0.4 0.2 1.6 1.0 0.6
Total large loss ratio 7.9 7.1 0.8 7.3 6.0 1.3
Losses incurred but not reported 8.3 (0.9) 9.2 7.5 2.2 5.3
Other losses excluding catastrophe
losses 26.8 38.9 (12.1) 30.7 37.0 (6.3)
Catastrophe losses 13.6 11.4 2.2 11.6 7.3 4.3
Total loss ratio 56.6 % 56.5 % 0.1 57.1 % 52.5 % 4.6
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. The second-quarter 2020 commercial lines total large losses incurred
of $69 million , net of reinsurance, were higher than the quarterly average of
$65 million during full-year 2019 and higher than the $58 million of total large
losses incurred for the second quarter of 2019. The increase in commercial lines
large losses for the first six months of 2020 was primarily due to our
commercial property and commercial casualty lines of business. The
second-quarter 2020 ratio for commercial lines total large losses was 0.8
percentage points higher than last year's second-quarter ratio. The
second-quarter 2020 amount of total large losses incurred contributed to the
increase in the six-month 2020 total large loss ratio, compared with 2019, in
addition to a first-quarter 2020 ratio that was 1.8 points higher than the first
quarter of 2019. We believe results for the three- and six-month periods
largely reflected normal fluctuations in loss patterns and normal variability in
large case reserves for claims above $1 million .
Cincinnati Financial Corporation Second-Quarter 2020 10-Q
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PERSONAL LINES INSURANCE RESULTS
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
Earned premiums $ 364 $ 348 5 $ 723 $ 692 4
Fee revenues 1 1 0 2 2 0
Total revenues 365 349 5 725 694 4
Loss and loss expenses from:
Current accident year before
catastrophe losses 194 216 (10) 410 425 (4)
Current accident year catastrophe
losses 92 38 142 135 76 78
Prior accident years before
catastrophe losses - (11) nm (23) (16) (44)
Prior accident years catastrophe
losses - (3) nm (5) 5 nm
Loss and loss expenses 286 240 19 517 490 6
Underwriting expenses 122 104 17 230 203 13
Underwriting profit (loss) $ (43) $ 5 nm $ (22) $ 1 nm
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year before
catastrophe losses 53.8 % 62.1 % (8.3) 56.9 % 61.4 % (4.5)
Current accident year catastrophe
losses 25.3 11.0 14.3 18.7 10.9 7.8
Prior accident years before
catastrophe losses 0.0 (3.2) 3.2 (3.2) (2.3) (0.9)
Prior accident years catastrophe
losses (0.2) (1.0) 0.8 (0.8) 0.7 (1.5)
Loss and loss expenses 78.9 68.9 10.0 71.6 70.7 0.9
Underwriting expenses 33.4 30.0 3.4 31.8 29.4 2.4
Combined ratio 112.3 % 98.9 % 13.4 103.4 % 100.1 % 3.3
Combined ratio 112.3 % 98.9 % 13.4 103.4 % 100.1 % 3.3
Contribution from catastrophe losses
and
prior years reserve development 25.1 6.8 18.3 14.7 9.3 5.4
Combined ratio before catastrophe
losses and
prior years reserve development 87.2 % 92.1 % (4.9) 88.7 % 90.8 % (2.1)
Overview
The COVID-19 pandemic did not have a significant effect on our personal lines
insurance segment premiums for the second quarter or first six months of 2020.
Net written premiums grew 5% during second-quarter 2020, following growth of 3%
for the first quarter of 2020 and 4% for full-year 2019. For the first six
months of 2020, net written premiums grew 4%, compared with 5% for the first
half of 2019. New business written premiums are largely driven by submissions
from agents for us to quote premiums for policies. During the first half of the
second quarter, submission volume was less than a year ago, but during the
quarter's second half it was more than last year, as stay-at-home restrictions
eased. Early in the second quarter of 2020, we announced a 15% policyholder
credit applied to each personal auto policy for the months of April and May,
resulting in approximately $16 million of underwriting expense that added 4.2
percentage points to the second-quarter personal lines underwriting expense
ratio. We are not able to determine other effects of the pandemic on future
periods.
Loss experience for our insurance operations is influenced by many factors.
During the second quarter of 2020, loss experience for our personal auto line of
business improved, largely due to a reduction in personal auto reported claims
as a result of reduced driving related to the pandemic. Because of factors that
reduce exposure to certain insurance losses, there could be a reduction in
future losses that generally corresponds to reduced premiums. However, there
could be losses or legal expenses that occur independent of changes in miles
driven for autos we insure. We are not able to determine premium or loss effects
for future periods.
Cincinnati Financial Corporation Second-Quarter 2020 10-Q
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Performance highlights for the personal lines segment include:
•Premiums - Personal lines earned premiums and net written premiums continued to
grow during the second quarter and first six months of 2020, driven by increases
in agency renewal written premiums reflecting higher average pricing. Personal
lines net written premiums from high net worth policies totaled approximately
$144 million and $246 million for the second quarter and first six months of
2020, compared with $116 million and $193 million for the same periods of 2019.
The table below analyzes the primary components of premiums.
Agency renewal written premiums increased 6% for the second quarter of 2020, and
5% for the first six months of the year, largely due to rate increases in select
states. We estimate that premium rates for our personal auto line of business
increased at average percentages in the mid-single-digit range during the first
six months of 2020. For our homeowner line of business, we estimate that premium
rates for the first six months of 2020 increased at average percentages in the
mid-single-digit range, higher than in 2019. 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 decreased 6% during the second
quarter and 5% during the first six months of 2020, compared with the same
periods of 2019. In addition to effects of underwriting and pricing discipline
in recent quarters, particularly in select states, the volume of new business
submissions from agents for us to quote premiums for policies slowed further
during the first half of the second quarter. In the second half of the second
quarter, volume increased compared with the same period a year ago.
Other written premiums include premiums ceded to reinsurers as part of our
reinsurance ceded program. For our personal lines insurance segment, a decrease
in ceded premiums increased net written premiums by $2 million and $1 million
for the second quarter and first six months of 2020, compared with the same
periods of 2019.
We continue to implement strategies discussed in our 2019 Annual Report on
Form 10-K, Item 1, Strategic Initiatives, Page 15, to enhance our responsiveness
to marketplace changes and to help achieve our long-term objectives for personal
lines growth and profitability. These strategies include initiatives to more
profitably underwrite homeowner policies.
Personal Lines Insurance Premiums
(Dollars in millions) Three months ended June 30, Six months ended
2020 2019 % Change 2020 2019 % Change
Agency renewal written premiums $ 387 $ 365 6 $ 681 $ 647 5
Agency new business written
premiums 44 47 (6) 78 82 (5)
Other written premiums (8) (10) 20 (17) (18) 6
Net written premiums 423 402 5 742 711 4
Unearned premium change (59) (54) (9) (19) (19) 0
Earned premiums $ 364 $ 348 5 $ 723 $ 692 4
•Combined ratio - Our personal lines combined ratio increased by 13.4 percentage
points for the second quarter of 2020, and 3.3 points for the six-month period,
compared with the same periods a year ago. Offsetting improved experience in the
ratios for current accident year loss and loss expenses before catastrophe
losses, the catastrophe loss ratio rose by 15.1 percentage points for the second
quarter and 6.3 points for the first half of 2020.
The current accident year loss and loss expenses before catastrophe losses ratio
for personal lines improved in the first six months of 2020. That 56.9% ratio
was 4.5 percentage points lower, compared with the 61.4% accident year 2019
ratio measured as of June 30, 2019 , including an increase of 0.1 percentage
points in the ratio for large losses of $1 million or more per claim, discussed
below.
Catastrophe losses and loss expenses accounted for 25.1 and 17.9 percentage
points of the combined ratio for the second quarter and first six months of
2020, compared with 10.0 and 11.6 percentage points for the same periods of last
year. The 10-year annual average catastrophe loss ratio for the personal lines
segment through 2019 was 10.4 percentage points, and the five-year annual
average was 9.3 percentage points.
Cincinnati Financial Corporation Second-Quarter 2020 10-Q
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In addition to the average rate increases discussed above, we continue to refine
our pricing to better match premiums to the risk of loss on individual policies.
Improved pricing precision and broad-based rate increases are expected to help
position the combined ratio at a profitable level over the long term. In
addition, greater geographic diversification is expected to reduce the
volatility of homeowner loss ratios attributable to weather-related catastrophe
losses over time.
The net effect of reserve development on prior accident years during the second
quarter and first six months of 2020 was favorable for personal lines overall by
less than $1 million and $28 million , respectively, compared with $14 million
and $11 million for the same periods of 2019. Our personal auto and homeowner
lines of business were the largest contributors to the personal lines net
favorable reserve development on prior accident years for the first six months
of 2020. 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 2019 Annual Report on Form 10-K, Item
7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss
Expense Reserves, Page 56.
The underwriting expense ratio increased for the second quarter and first six
months of 2020, compared with the same periods a year ago, largely due to the
15% policyholder credit applied to each personal auto policy for the months of
April and May 2020 . The ratio also reflects ongoing expense management efforts
and higher earned premiums.
Personal Lines Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance) Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
Current accident year losses greater
than $5 million $ - $ - nm $ - $ - nm
Current accident year losses $1
million - $5 million 8 10 (20) 20 19 5
Large loss prior accident year
reserve development 2 1 100 7 3 133
Total large losses incurred 10 11 (9) 27 22 23
Losses incurred but not reported 41 (4) nm 65 - nm
Other losses excluding catastrophe
losses 105 167 (37) 232 330 (30)
Catastrophe losses 89 34 162 127 79 61
Total losses incurred $ 245 $ 208 18 $ 451 $ 431 5
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 2.3 2.8 (0.5) 2.9 2.8 0.1
Large loss prior accident year
reserve development 0.5 0.3 0.2 0.9 0.4 0.5
Total large loss ratio 2.8 3.1 (0.3) 3.8 3.2 0.6
Losses incurred but not reported 11.3 (1.1) 12.4 8.9 (0.1) 9.0
Other losses excluding catastrophe
losses 28.8 48.0 (19.2) 32.2 47.8 (15.6)
Catastrophe losses 24.6 9.7 14.9 17.5 11.4 6.1
Total loss ratio 67.5 % 59.7 % 7.8 62.4 % 62.3 % 0.1
We continue to monitor new losses and case reserve increases greater than $1
million for trends in factors such as initial reserve levels, loss cost
inflation and claim settlement expenses. Our analysis continues to indicate
no unexpected concentration of these large losses and case reserve increases by
risk category, geographic region, policy inception, agency or field marketing
territory. In the second quarter of 2020, the personal lines total large loss
ratio, net of reinsurance, was 0.3 percentage points lower than last year's
second quarter. The increase in personal lines large losses for the first six
months of 2020 occurred primarily for umbrella coverage in our other personal
line of business. The second-quarter 2020 amount of total large losses incurred
favorably contributed to the increase in the six-month 2020 total large loss
ratio, compared with 2019, as it partially offset a first-quarter 2020 ratio
that was 1.4 points higher than the first quarter of 2019. We believe results
for the three- and six-month periods largely reflected normal fluctuations in
loss patterns and normal variability in large case reserves for claims
above $1 million .
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EXCESS AND SURPLUS LINES INSURANCE RESULTS
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
Earned premiums $ 78 $ 67 16 $ 156 $ 130 20
Fee revenues - - 0 1 1 0
Total revenues 78 67 16 157 131 20
Loss and loss expenses from:
Current accident year before
catastrophe losses 46 34 35 90 69 30
Current accident year catastrophe
losses 3 - nm 3 - nm
Prior accident years before
catastrophe losses 8 (5) nm 9 (7) nm
Prior accident years catastrophe
losses - - 0 - - 0
Loss and loss expenses 57 29 97 102 62 65
Underwriting expenses 22 21 5 47 41 15
Underwriting profit (loss) $ (1) $ 17 nm $ 8 $ 28 (71)
Ratios as a percent of earned
premiums: Pt. Change Pt. Change
Current accident year before
catastrophe losses 59.0 % 50.8 % 8.2 57.4 % 53.1 % 4.3
Current accident year catastrophe
losses 3.6 0.7 2.9 2.0 0.5 1.5
Prior accident years before
catastrophe losses 11.2 (6.2) 17.4 5.9 (5.2) 11.1
Prior accident years catastrophe
losses (0.2) (0.2) 0.0 0.2 (0.1) 0.3
Loss and loss expenses 73.6 45.1 28.5 65.5 48.3 17.2
Underwriting expenses 28.4 31.0 (2.6) 30.0 31.4 (1.4)
Combined ratio 102.0 % 76.1 % 25.9 95.5 % 79.7 % 15.8
Combined ratio 102.0 % 76.1 % 25.9 95.5 % 79.7 % 15.8
Contribution from catastrophe losses
and
prior years reserve development 14.6 (5.7) 20.3 8.1 (4.8) 12.9
Combined ratio before catastrophe
losses and
prior years reserve development 87.4 % 81.8 % 5.6 87.4 % 84.5 % 2.9
Overview
The COVID-19 pandemic did not have a significant effect on our excess and
surplus lines insurance segment premiums during the second quarter or first six
months of 2020. For most of the six-month period, we experienced a higher level
of submissions from our agents requesting our quote for prospective
policyholders, compared with the same period of 2019. During the first half of
the second quarter, submission volume was less than a year ago, but during the
quarter's second half it was more than last year, as government restrictions
eased and businesses reopened. We are not able to determine other effects of the
pandemic on future periods.
Loss experience for our insurance operations is influenced by many factors. We
have not determined any material effect on our loss experience for the second
quarter or first six months of 2020 as a result of the pandemic. Because of
factors that reduce exposure to certain insurance losses, such as reduced sales
for businesses, there could be a reduction in future losses that generally
corresponds to reduced premiums. However, there could be losses or legal
expenses that occur independent of changes in sales of businesses we insure. We
are not able to determine premium or loss effects for future periods.
Performance highlights for the excess and surplus lines segment include:
•Premiums - Excess and surplus lines net written premiums continued to grow
during the second quarter and first six months of 2020, compared with the same
periods a year ago, primarily due to an increase in agency renewal written
premiums. Renewal written premiums rose 21% for the six months ended June 30,
2020 , compared with the same period of 2019, reflecting the opportunity to renew
many accounts for the first time, as well as higher renewal pricing. For the
first six months of 2020, excess and surplus lines policy renewals experienced
estimated average price increases at percentages in the mid-single-digit range.
We measure
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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 $4 million and
$5 million for the second quarter and first six months 2020, compared with the
same periods of 2019, as we continued to carefully underwrite each policy in a
highly competitive market. Some of what we report as new business came from
accounts that were not new to our agents. We believe our agents' seasoned
accounts tend to be priced more accurately than business that may be less
familiar to them.
Excess and Surplus Lines Insurance Premiums
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
Agency renewal written premiums $ 63 $ 54 17 $ 125 $ 103 21
Agency new business written
premiums 32 28 14 59 54 9
Other written premiums (4) (4) 0 (8) (8) 0
Net written premiums 91 78 17 176 149 18
Unearned premium change (13) (11) (18) (20) (19) (5)
Earned premiums $ 78 $ 67 16 $ 156 $ 130 20
•Combined ratio - The excess and surplus lines combined ratio increased by 25.9
and 15.8 percentage points for the second quarter and first six months of 2020,
compared with the same periods of 2019. The increase was largely due to less
favorable reserve development on prior accident years, while the current
accident year result also increased. Those increases reflect more prudent
reserving, as claims on average are remaining open longer than previously
expected. The IBNR portion of the total loss and loss expense ratio before
catastrophe losses was 14.6 percentage points higher for the first six months of
2020, compared with the same period a year ago, while both the paid and case
incurred portions were approximately 1 point higher.
The current accident year loss and loss expenses before catastrophe losses ratio
for excess and surplus lines increased in the first six months of 2020. That
57.4% ratio was 4.3 percentage points higher, compared with the 53.1% accident
year 2019 ratio measured as of June 30, 2019 , including a decrease of
1.1 percentage points in the ratio for large losses of $1 million or more per
claim, discussed below. The paid portion of the 4.3 percentage point increase
was up 0.2 points, the case incurred portion was down 3.7 points and the IBNR
portion was up 8.0 points.
Excess and surplus lines net reserve development on prior accident years, as a
ratio to earned premiums, was an unfavorable 11.0% and 6.1% for the second
quarter and first six months of 2020, compared with favorable net reserve
development of 6.4% and 5.3% for the same periods of 2019. The $9 million of net
unfavorable reserve development recognized during the first six months of 2020
included $11 million for accident years prior to 2017, as claims on average are
remaining open longer than previously expected. Reserve estimates are inherently
uncertain as described in our 2019 Annual Report on Form 10-K, Item 7, Critical
Accounting Estimates, Property Casualty Insurance Loss and Loss Expense
Reserves, Page 56.
The excess and surplus lines underwriting expense ratio for the second quarter
and first six months of 2020 decreased, compared with the same periods of 2019,
reflecting a lower level of profit-sharing commissions for agencies in addition
to higher earned premiums and ongoing expense management efforts.
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Excess and Surplus Lines Insurance Losses Incurred by Size
(Dollars in millions, net of
reinsurance) Three months ended June 30, Six months ended June 30,
2020 2019 % Change 2020 2019 % Change
Current accident year losses greater
than $5 million $ - $ - nm $ - $ - nm
Current accident year losses$1 million -$5 million - 2 (100) 2 3 (33) Large loss prior accident year reserve development - 1 (100) (1) 2 nm Total large losses incurred - 3 (100) 1 5 (80) Losses incurred but not reported 21 (3) nm 18 (3)
nm
Other losses excluding catastrophe losses 20 18 11 50 36 39 Catastrophe losses 3 - nm 3 1 200 Total losses incurred$ 44 $ 18 144$ 72 $ 39 85 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 - 3.0 (3.0) 1.3 2.4 (1.1) Large loss prior accident year reserve development 0.1 1.5 (1.4) (0.7) 1.3 (2.0) Total large loss ratio 0.1 4.5 (4.4) 0.6 3.7 (3.1) Losses incurred but not reported 27.2 (4.5) 31.7 11.3 (1.9) 13.2 Other losses excluding catastrophe losses 25.8 26.7 (0.9) 31.9 27.9 4.0 Catastrophe losses 3.3 0.5 2.8 2.1 0.3 1.8 Total loss ratio 56.4 % 27.2 % 29.2 45.9 % 30.0 % 15.9 We continue to monitor new losses and case reserve increases greater than$1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the second quarter of 2020, the excess and surplus lines total ratio for large losses, net of reinsurance, was 4.4 percentage points lower than last year's second quarter. The second-quarter 2020 amount of total large losses incurred contributed to the decrease in the six-month 2020 total large loss ratio, compared with 2019, in addition to a first-quarter 2020 ratio that was 1.7 points lower than the first quarter of 2019. We believe results for the three- and six-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above$1 million . Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 49 --------------------------------------------------------------------------------
LIFE INSURANCE RESULTS
Six months ended June
(Dollars in millions) Three months ended June 30, 30,
2020 2019 % Change 2020 2019 % Change
Earned premiums $ 79 $ 67 18 $ 146 $ 133 10
Fee revenues 1 1 0 1 2 (50)
Total revenues 80 68 18 147 135 9
Contract holders' benefits incurred 79 73 8 152 143 6
Investment interest credited to
contract holders (25) (25) 0 (51) (49) (4)
Underwriting expenses incurred 25 22 14 43 44 (2)
Total benefits and expenses 79 70 13 144 138 4
Life insurance segment profit
(loss) $ 1 $ (2) nm $ 3 $ (3) nm
Overview
The COVID-19 pandemic did not have a significant effect on our life insurance
segment earned premiums, benefits or expenses for the first six months of 2020.
However, higher rates of unemployment related to the pandemic could meaningfully
decrease premiums of our life insurance products and cause an increase in policy
surrender activity in future periods. Specifically, growth in worksite premiums,
which originate from enrollments at the workplace, slowed to a small extent in
the second quarter of 2020, and could continue to slow in the future, due to
curtailed enrollment activity. We are not able to determine other premium,
benefit or expense effects for future periods. It is also possible we may
experience higher than projected future death claims due to the pandemic.
Performance highlights for the life insurance segment include:
•Revenues - Revenues increased for the six months ended June 30, 2020 , compared
with the same period a year ago, with higher earned premiums from term life
insurance, our largest life insurance product line, the largest contributor to
the increase.
Net in-force life insurance policy face amounts increased to $72.188 billion at
June 30, 2020 , from $69.984 billion at year-end 2019.
Fixed annuity deposits received for the three and six months ended June 30,
2020 , were $13 million and $24 million , compared with $13 million and $20
million for the same periods of 2019. 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
Six months ended June
(Dollars in millions) Three months ended June 30, 30,
2020 2019 % Change 2020 2019 % Change
Term life insurance $ 51 $ 47 9 $ 98 $ 92 7
Universal life insurance 16 10 60 24 20 20
Other life insurance and annuity
products 12 10 20 24 21 14
Net earned premiums $ 79 $ 67 18 $ 146 $ 133 10
•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 $3 million for
our life insurance segment in the first six months of 2020, compared with a loss
of $3 million for the same period of 2019, was primarily due to higher earned
premiums and improved mortality results, partially offset by the less favorable
effects of the unlocking of interest rate and other actuarial assumptions.
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Life insurance segment benefits and expenses consist principally of contract
holders' (policyholders') benefits incurred related to traditional life and
interest-sensitive products and operating expenses incurred, net of deferred
acquisition costs. Total benefits increased in the first six months of 2020.
Life policy and investment contract reserves increased with continued growth in
net in-force life insurance policy face amounts and less favorable effects of
the unlocking of interest rate and other actuarial assumptions. Mortality
results decreased, compared with the same period of 2019, and were below our
2020 projections.
Underwriting expenses for the first six months of 2020 decreased compared with
the same period a year ago, largely due to lower commission and general
insurance expense levels compared to the same period of 2019.
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 $12 million
for the second quarter of 2020 and net loss of $1 million for the six months
ended June 30, 2020 , compared with net income of $8 million and $18 million for
the same periods of 2019. The life insurance company portfolio had a net
after-tax investment gain of less than $1 million for the second quarter of 2020
and a net after-tax investment loss of $25 million for the six months ended
June 30, 2020 , compared with net after-tax investment losses of less than $1
million and $1 million for the three and six months ended June 30, 2019 . The
increased after-tax investment losses for the six months ended June 30, 2020 ,
were due to impairments of fixed-maturity securities.
INVESTMENTS RESULTS
Overview
The investments segment contributes investment income and investment gains and
losses to results of operations. Investments traditionally are our primary
source of pretax and after-tax profits. During the first six months of 2020, the
COVID-19 pandemic and related economic effects caused volatility in fair values
of securities discussed below in Total Investment Gains and Losses. Our
fixed-maturity and equity portfolios experienced a decrease in valuation during
the first quarter of 2020, in large part due to the volatility and economic
uncertainty caused by the coronavirus outbreak that affected various sectors of
our portfolio. During the first quarter of 2020, already low oil prices and the
sudden demand drop in related products due to governmental actions, such as
shelter-in-place orders, contributed to the energy sector accounting for most of
the write-downs of impaired securities in the tables below. During
second-quarter 2020, valuation increased for a significant portion of our
fixed-maturity and equity portfolios.
Investment Income
Pretax investment income grew 4% for both the second quarter and the first six
months of 2020, compared with the same periods of 2019. Interest income
increased by $3 million and $4 million for the three and six months ended June
30, 2020 , as net purchases of fixed-maturity securities in recent quarters
generally offset the continuing effects of the low interest rate environment.
Higher dividend income reflected rising dividend rates and net purchases of
equity securities in recent quarters, helping dividend income to grow by $3
million and $10 million for the three and six months ended June 30, 2020 .
Investments Results
Six months ended June
(Dollars in millions) Three months ended June 30, 30,
2020 2019 % Change 2020 2019 % Change
Total investment income, net of
expenses $ 166 $ 160 4 $ 331 $ 317 4
Investment interest credited to
contract holders (25) (25) - (51) (49) (4)
Investment gains and losses, net 1,060 364 191 (665) 1,027 nm
Investments profit (loss), pretax $ 1,201 $ 499 141 $ (385) $ 1,295 nm
Cincinnati Financial Corporation Second-Quarter 2020 10-Q
Page 51-------------------------------------------------------------------------------- We continue to position our portfolio considering both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield. The table below shows the average pretax yield-to-amortized cost associated with expected principal redemptions for our fixed-maturity portfolio. The expected principal redemptions are based on par amounts and include dated maturities, calls and prefunded municipal bonds that we expect will be called during each respective time period. (Dollars in millions) Principal At June 30, 2020 % Yield redemptions Fixed-maturity pretax yield profile: Expected to mature during the remainder of 2020 4.56 %$ 287 Expected to mature during 2021 4.36 852 Expected to mature during 2022 4.09 911 Average yield and total expected maturities from the remainder of 2020 through 2022 4.27$ 2,050 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 six months of 2020 was higher than the 4.10% average yield-to-amortized cost of the fixed-maturity securities portfolio at the end of 2019. Our fixed-maturity portfolio's average yield of 4.06% for the first six months of 2020, from the investment income table below, was lower than that yield for the year-end 2019 fixed-maturities portfolio. Six months ended June Three months ended June 30, 30, 2020 2019 2020 2019 Average pretax yield-to-amortized cost on new fixed-maturities: Acquired taxable fixed-maturities 4.81 % 4.56 % 4.38 % 4.70 % Acquired tax-exempt fixed-maturities 2.86 3.13 2.91 3.22 Average total fixed-maturities acquired 4.40 4.14 4.22 4.36 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 2019 Annual Report on Form 10-K, Item 1, Investments Segment, Page 27, and Item 7, Investments Outlook, Page 95. 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 Second-Quarter 2020 10-Q Page 52 -------------------------------------------------------------------------------- The table below provides details about investment income. Average yields in this table are based on the average invested asset and cash amounts indicated in the table, using fixed-maturity securities valued at amortized cost and all other securities at fair value. (Dollars in millions) Three months ended June 30, Six months ended June 30, 2020 2019 % Change 2020 2019 % Change Investment income: Interest$ 114 $ 111 3$ 226 $ 222 2 Dividends 53 50 6 106 96 10 Other 2 2 0 5 5 0 Less investment expenses 3 3 0 6 6 0 Investment income, pretax 166 160 4 331 317 4 Less income taxes 25 25 0 51 49 4 Total investment income, after-tax$ 141 $ 135 4$ 280 $ 268 4 Investment returns: Average invested assets plus cash and cash equivalents$ 18,759 $ 18,648 $ 19,672 $ 18,194 Average yield pretax 3.54 % 3.43 % 3.37 % 3.48 % Average yield after-tax 3.01 2.90 2.85 2.95 Effective tax rate 15.6 15.6 15.5 15.6 Fixed-maturity returns: Average amortized cost$ 11,107 $ 10,783 $ 11,124 $ 10,738 Average yield pretax 4.11 % 4.12 % 4.06 % 4.13 % Average yield after-tax 3.42 3.43 3.39 3.45 Effective tax rate 16.7 16.6 16.6 16.6 Total Investment Gains and Losses Investment gains and losses are recognized on the sale of investments, for certain changes in fair values of securities even though we continue to hold the securities or as otherwise required by GAAP. The change in fair value for equity securities still held are included in investment gains and losses and also in net income. The change in unrealized gains or losses for fixed-maturity securities are included as a component of other comprehensive income (OCI). Accounting requirements for the allowance for credit losses and other-than-temporary impairment (OTTI) charges for the fixed-maturity portfolio are disclosed in our 2019 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 133 and in this quarterly report Item 1, Note 1, Accounting Policies. Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 53 --------------------------------------------------------------------------------
The table below summarizes total investment gains and losses, before taxes.
Six months ended June
(Dollars in millions) Three months ended June 30, 30,
2020 2019 2020 2019
Investment gains and losses:
Equity securities:
Investment gains and losses on securities
sold, net $ 24 $ 11 $ 17 $ 23
Unrealized gains and losses on securities
still held, net 1,044 355 (602) 999
Subtotal 1,068 366 (585) 1,022
Fixed maturities:
Gross realized gains 3 1 5 3
Gross realized losses (3) (2) (3) (2)
Write-down of impaired securities - - (77) -
Subtotal - (1) (75) 1
Other (8) (1) (5) 4
Total investment gains and losses reported
in net income 1,060 364 (665) 1,027
Change in unrealized investment gains and
losses:
Fixed maturities 506 200 182 442
Total $ 1,566 $ 564 $ (483) $ 1,469
Of the 4,010 fixed-maturity securities in the portfolio, five securities were
trading below 70% of amortized cost at June 30, 2020 , with a fair value of $7
million and an unrealized loss of $3 million . Our asset impairment committee
regularly monitors the portfolio, including a quarterly review of the entire
portfolio for potential credit losses, resulting in charges disclosed in the
table below. We believe that if liquidity in the markets were to significantly
deteriorate or economic conditions were to significantly weaken, we could
experience declines in portfolio values and possibly increases in the allowance
for credit losses or write-downs to fair value.
The table below provides additional details for write-downs of impaired
securities or OTTI charges. We had no allowance for credit losses for the first
six months of 2020.
(Dollars in millions) Three months ended June 30, Six months ended June 30,
2020 2019 2020 2019
Fixed maturities:
Energy $ - $ - $ 62 $ -
Real Estate - - 13 -
Consumer Goods - - 1 -
Technology & Electronics - - 1 -
Total fixed maturities $ - $ - $ 77 $ -
Cincinnati Financial Corporation Second-Quarter 2020 10-Q
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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, our reinsurance assumed operation, and Cincinnati Global, since its acquisition onFebruary 28, 2019 . Underwriting results in the table below for Cincinnati Re and Cincinnati Global include earned premiums, loss and loss expenses and underwriting expenses. Total revenues for the first six months of 2020 for our Other operations increased, compared with the same period of 2019, primarily due to earned premiums from Cincinnati Re and Cincinnati Global, with increases of$33 million and$18 million , respectively. Total expenses for Other increased for the first six months of 2020, primarily due to more losses and loss expenses from Cincinnati Re and Cincinnati Global. Other loss in the table below represents losses before income taxes. For both periods shown, Other loss resulted largely from interest expense from debt of the parent company. (Dollars in millions) Three months ended June 30, Six months ended June 30, 2020 2019 % Change 2020 2019 % Change Interest and fees on loans and leases $ 2$ 1 100$ 3 $ 3 0 Earned premiums 91 79 15 180 129 40 Other revenues 1 1 0 2 1 100 Total revenues 94 81 16 185 133 39 Interest expense 14 13 8 27 26 4 Loss and loss expenses 68 44 55 114 70 63 Underwriting expenses 28 21 33 57 37 54 Operating expenses 5 4 25 10 12 (17) Total expenses 115 82 40 208 145 43 Total other loss$ (21) $ (1) nm$ (23) $ (12) (92) TAXES We had$236 million of income tax expense and$114 million of income tax benefit for the three and six months endedJune 30, 2020 , compared with$102 million and$274 million of income tax expense for the same periods of 2019. The effective tax rate for the three and six months endedJune 30, 2020 , was 20.6% and 26.5% compared with 19.2% and 19.6% for the same periods last year. The change in our effective tax rate between periods was primarily due to large net investment losses included in income for 2020 versus net investment gains included in income for the prior-year period as well as changes in underwriting income. Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See Tax-Exempt Fixed Maturities in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk for further discussion on municipal bond purchases in our fixed-maturity investment portfolio. For 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 from the 1986 Tax Reform Act. Our noninsurance companies own an immaterial amount of tax-advantaged fixed-maturity investments. For our noninsurance companies, the dividend received deduction exempts 50% of dividends from qualified equities. Our life insurance company does not own tax-advantaged fixed-maturity investments or equities subject to the dividend received deduction. Details about our effective tax rate are in this quarterly report Item 1, Note 9, Income Taxes. Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 55 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES AtJune 30, 2020 , shareholders' equity was$9.258 billion , compared with$9.864 billion atDecember 31, 2019 . Total debt was$910 million atJune 30, 2020 , up$83 million fromDecember 31, 2019 . AtJune 30, 2020 , cash and cash equivalents totaled$706 million , compared with$767 million atDecember 31, 2019 . The effects from COVID-19 were a contributor to the decrease in shareholders' equity in the first half of 2020 due to the decline in fair values of our equity securities portfolio and pandemic-related incurred losses and expenses. The pandemic did not have a significant effect on our cash flows for the first half of 2020. The COVID-19 pandemic slowed the growth of our premium revenues for the second quarter and first six months of 2020. Most states where we market our products issued mandates or requests such as moratoriums on policy cancellations or nonrenewals for nonpayments of premiums, forbearance on premium collections, waivers of late payment fees and extended periods in which policyholders may make their missed payments. Extended or future moratoriums and deferral of premiums may disrupt cash flows while also increasing credit risk from policyholders struggling to make timely premium payments. In addition to our historically positive operating cash flow to meet the needs of operations, we have the ability to sell a portion of our high-quality, liquid investment portfolio or slow investing activities if such need arises. We also have additional capacity to borrow on our revolving short-term line of credit, as described further below.
SOURCES OF LIQUIDITY
Subsidiary Dividends Our lead insurance subsidiary declared dividends of$225 million to the parent company in the first six months of 2020, compared with$300 million for the same period of 2019. For full-year 2019, subsidiary dividends declared totaled$625 million .State of Ohio regulatory requirements restrict the dividends our insurance subsidiary can pay. For full-year 2020, total dividends that our insurance subsidiary can pay to our parent company without regulatory approval are approximately$562 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 2019 Annual Report on Form 10-K, Item 1, Investments Segment, Page 27.
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.
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--------------------------------------------------------------------------------The table below shows a summary of operating cash flow for property casualty insurance (direct method):
Six months ended June
(Dollars in millions) Three months ended June 30, 30,
2020 2019 % Change 2020 2019 % Change
Premiums collected $ 1,518 $ 1,443 5 $ 2,985 $ 2,792 7
Loss and loss expenses paid (751) (798) 6 (1,568) (1,622) 3
Commissions and other underwriting
expenses paid (397) (383) (4) (988) (897) (10)
Cash flow from underwriting 370 262 41 429 273 57
Investment income received 110 107 3 229 220 4
Cash flow from operations $ 480 $ 369 30 $ 658 $ 493 33
Collected premiums for property casualty insurance rose $193 million during the
first six months of 2020, compared with the same period in 2019. Loss and loss
expenses paid for the 2020 period decreased $54 million . Commissions and other
underwriting expenses paid increased $91 million , primarily due to higher
commissions paid to agencies, reflecting the increase in collected premiums.
We discuss our future obligations for claims payments and for underwriting expenses in our 2019 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 101, and Other Commitments also on Page 101.
Capital Resources AtJune 30, 2020 , our debt-to-total-capital ratio was 8.9%, considerably below our 35% covenant threshold, with$788 million in long-term debt and$122 million in borrowing on our revolving short-term line of credit. We borrowed an additional$75 million in the first quarter of 2020, from the$39 million balance atDecember 31, 2019 , which was used to repurchase shares during the first quarter of 2020. AtJune 30, 2020 ,$178 million was available for future cash management needs as part of the general provisions of the line of credit agreement, with another$300 million available as part of an accordion feature. Based on our capital requirements atJune 30, 2020 , we do not anticipate a material increase in debt levels exceeding the available line of credit amount during the remainder of the year. As a result, we expect changes in our debt-to-total-capital ratio to continue to be largely a function of the contribution of unrealized investment gains or losses to shareholders' equity. As part of our Cincinnati Global acquisition, onFebruary 25, 2019 , we entered into an unsecured letter of credit agreement to provide a portion of the capital needed to support its obligations at Lloyd's. The amount of this unsecured letter of credit agreement was$130 million atJune 30, 2020 .
We provide details of our three long-term notes in this quarterly report Item 1, Note 3, Fair Value Measurements. None of the notes are encumbered by rating triggers.
Four independent ratings firms award insurer financial strength ratings to our property casualty insurance companies and three firms rate our life insurance company. Those firms made no changes to our parent company debt ratings during the first three months of 2020. Our debt ratings are discussed in our 2019 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, Other Sources of Liquidity, Page 99. 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. Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 57 -------------------------------------------------------------------------------- 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, 2019 , in our 2019 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 101. There have been no material changes to our estimates of future contractual obligations since our 2019 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$630 million in the first six months of 2020. 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$358 million in the first six months of 2020. There were no contributions to our qualified pension plan during the first six months of 2020. Investing Activities After fulfilling operating requirements, we invest cash flows from underwriting, investment and other corporate activities in fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We discuss our investment strategy and certain portfolio attributes in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk. Uses of Capital Uses of cash to enhance shareholder return include dividends to shareholders. InJanuary 2020 , the board of directors declared regular quarterly cash dividends of60 cents per share for an indicated annual rate of$2.40 per share. During the first six months of 2020, we used$185 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 2019 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves, Page 102. Total gross reserves atJune 30, 2020 , increased$321 million compared withDecember 31, 2019 . Case loss reserves for losses increased by$23 million , IBNR loss reserves increased by$263 million and loss expense reserves increased by$35 million . The total gross increase was primarily due to our commercial casualty and commercial property lines of business and our excess and surplus lines insurance segment. Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 58 -------------------------------------------------------------------------------- Property Casualty Gross Reserves (Dollars in millions) Loss reserves Loss expense Total gross Case reserves IBNR reserves reserves reserves Percent At June 30, 2020 of total Commercial lines insurance: Commercial casualty$ 963 $ 728 $ 628 $ 2,319 36.2 % Commercial property 369 50 78 497 7.8 Commercial auto 388 208 138 734 11.4 Workers' compensation 397 526 87 1,010 15.8 Other commercial 94 11 87 192 3.0 Subtotal 2,211 1,523 1,018 4,752 74.2 Personal lines insurance: Personal auto 207 86 70 363 5.7 Homeowner 150 55 45 250 3.9 Other personal 54 83 5 142 2.2 Subtotal 411 224 120 755 11.8 Excess and surplus lines 169 120 113 402 6.3 Cincinnati Re 61 235 2 298 4.6 Cincinnati Global 135 65 2 202 3.1 Total$ 2,987 $ 2,167 $ 1,255 $ 6,409 100.0 % AtDecember 31, 2019 Commercial lines insurance: Commercial casualty$ 937 $ 680 $ 622 $ 2,239 36.8 % Commercial property 339 20 64 423 7.0 Commercial auto 409 157 143 709 11.6 Workers' compensation 404 516 93 1,013 16.6 Other commercial 108 7 70 185 3.0 Subtotal 2,197 1,380 992 4,569 75.0 Personal lines insurance: Personal auto 233 46 78 357 5.9 Homeowner 134 32 41 207 3.4 Other personal 49 69 5 123 2.0 Subtotal 416 147 124 687 11.3 Excess and surplus lines 149 102 100 351 5.8 Cincinnati Re 47 204 2 253 4.2 Cincinnati Global 155 71 2 228 3.7 Total$ 2,964 $ 1,904 $ 1,220 $ 6,088 100.0 % LIFE POLICY AND INVESTMENT CONTRACT RESERVES Gross life policy and investment contract reserves were$2.881 billion atJune 30, 2020 , compared with$2.835 billion at year-end 2019, reflecting continued growth in life insurance policies in force. We discuss our life insurance reserving practices in our 2019 Annual Report on Form 10-K, Item 7, Life Insurance Policyholder Obligations and Reserves, Page 108. Cincinnati Financial Corporation Second-Quarter 2020 10-Q Page 59 --------------------------------------------------------------------------------
OTHER MATTERS
SIGNIFICANT ACCOUNTING POLICIES Our significant accounting policies are discussed in our 2019 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 133, and updated in this quarterly report Item 1, Note 1, Accounting Policies.
In conjunction with those discussions, in the Management's Discussion and Analysis in the 2019 Annual Report on Form 10-K, management reviewed the estimates and assumptions used to develop reported amounts related to the most significant policies. Management discussed the development and selection of those accounting estimates with the audit committee of the board of directors.
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