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CINF Cincinnati Financial

Filed: 25 Feb 21, 9:20am

United States Securities and Exchange Commission
Washington, D.C. 20549
 
Form 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the fiscal year ended December 31, 2020.
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the transition period from _____________________ to _____________________.
 
Commission file number 000-04604
 
Cincinnati Financial Corporation
(Exact name of registrant as specified in its charter)
 
Ohio31-0746871
(State of incorporation)(I.R.S. Employer Identification No.)

 6200 S. Gilmore Road
Fairfield, Ohio 45014-5141
(Address of principal executive offices) (Zip Code)
(513) 870-2000
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $2.00 parCINFNasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes       No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes       No
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 if Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes       No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Cincinnati Financial Corporation - 2020 10-K - Page 1


 
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company
Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No

The aggregate market value of voting stock held by nonaffiliates of the Registrant based on the closing price of $64.03 per share as reported on Nasdaq Global Select Market on June 30, 2020, was $9,621,748,017.
 
As of February 19, 2021, there were 161,201,922 shares of common stock outstanding.
 
Document Incorporated by Reference
 
Portions of the definitive Proxy Statement for Cincinnati Financial Corporation’s Annual Meeting of Shareholders to be held on May 8, 2021, are incorporated by reference into Part III of this Form 10-K.
Cincinnati Financial Corporation - 2020 10-K - Page 2


2020 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Part I
Item 1.Business
Cincinnati Financial Corporation – Introduction
Our Business and Our Strategy
Our Segments
Other
Regulation
Item 1A.Risk Factors
Item 1B.Unresolved Staff Comments
Item 2.Properties
Item 3.Legal Proceedings
Item 4.Mine Safety Disclosures
Part II
Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6Selected Financial Data
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Executive Summary
Critical Accounting Estimates
Recent Accounting Pronouncements
Financial Results
Liquidity and Capital Resources
Safe Harbor Statement
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Item 8.Financial Statements and Supplementary Data
Responsibility for Financial Statements
Management’s Annual Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.Controls and Procedures
Item 9B.Other Information
Part III
Item 10.Directors, Executive Officers and Corporate Governance
Item 11.Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.Certain Relationships and Related Transactions, and Director Independence
Item 14.Principal Accounting Fees and Services
Part IV
Item 15.Exhibit and Financial Statement Schedules
Cincinnati Financial Corporation - 2020 10-K - Page 3


Part I

ITEM 1.    Business

Cincinnati Financial Corporation – Introduction
We are an Ohio corporation formed in 1968. Our lead subsidiary, The Cincinnati Insurance Company, was founded in 1950. Our main business is property casualty insurance marketed through independent insurance agencies in 45 states. Our headquarters is in Fairfield, Ohio.
 
Cincinnati Financial Corporation owns 100% of four subsidiaries: The Cincinnati Insurance Company (Cincinnati Insurance), Cincinnati Global Underwriting Ltd.SM (Cincinnati Global), CSU Producer Resources Inc. and CFC Investment Company. In addition, the parent company has an investment portfolio, owns the headquarters property and is responsible for corporate borrowings and shareholder dividends.
 
The Cincinnati Insurance Company owns 100% of four additional insurance subsidiaries. Our standard market property casualty insurance group includes two of those subsidiaries – The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group writes a broad range of business, homeowner and auto policies. The Cincinnati Insurance Company also conducts the business of our reinsurance assumed operations, known as Cincinnati Re®. Other subsidiaries of The Cincinnati Insurance Company include: The Cincinnati Life Insurance Company (Cincinnati Life), which provides life insurance policies and fixed annuities; and The Cincinnati Specialty Underwriters Insurance Company (Cincinnati Specialty Underwriters), which offers excess and surplus lines insurance products. In this report and elsewhere we often refer to any or all of these five companies as The Cincinnati Insurance Companies.
 
Cincinnati Global owns 100% of Cincinnati Global Underwriting Agency Ltd.SM, a London-based, global specialty underwriter for Lloyd's Syndicate 318, and Cincinnati Global Dedicated No. 2 Ltd.SM, a Lloyd’s corporate member and vehicle through which capital is provided by Cincinnati Financial Corporation and third-party names at Lloyd’s.

The two noninsurance subsidiaries of Cincinnati Financial Corporation are CSU Producer Resources, which offers insurance brokerage services to our independent agencies so their clients can access our excess and surplus lines insurance products; and CFC Investment Company, which offers commercial leasing and financing services to our agencies, their clients and other customers.
 
Our filings with the U.S. Securities and Exchange Commission (SEC) are available on our website,
cinfin.com/investors, as soon as possible after they have been filed with the SEC. Reports filed with the SEC may also be viewed at sec.gov. These filings include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. In this report we reference various websites. These websites, including our own, are not incorporated by reference in this Annual Report on Form 10-K.
 
Periodically, we refer to estimated industry data so that we can give information about our performance versus the overall U.S. insurance industry. Unless otherwise noted, the industry data is prepared by A.M. Best, a leading insurance industry statistical, analytical and insurer financial strength and credit rating organization. Information from A.M. Best is presented on a statutory accounting basis for insurance company regulation in the United States of America. When we provide our results on a comparable statutory accounting basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).
 
Cincinnati Financial Corporation - 2020 10-K - Page 4


Our Business and Our Strategy
Introduction
The Cincinnati Insurance Company was founded more than 70 years ago by four independent insurance agents. They established the mission that continues to guide all of the companies in the Cincinnati Financial Corporation family – to grow profitably and enhance the ability of local independent insurance agents to deliver quality financial protection to the people and businesses they serve by:
providing insurance market stability through financial strength
producing competitive, up-to-date products and services
developing associates committed to superior service

At the end of 2020, we employed 5,266 associates, including 3,362 headquarters associates who provide support to 1,849 field associates and 55 associates for Cincinnati Global. The associate voluntary turnover rate has been approximately 5% for several years.

We believe our compensation, training, technology, inclusive culture and other support help to develop, attract and retain our associates, which is critical to our strategy that emphasizes superior service to agencies and their clients, as described in this report. Our goal is to hire job candidates with promise, matching their strengths to positions within the company and providing resources to help them meet professional and personal goals. We are committed to providing equal opportunity for all associates, encouraging a work environment free from unlawful discrimination and harassment.

We use multiple channels to ensure we recruit a diverse workforce rich with ideas and knowledge. For example, we build relationships with future talent by partnering with career services department, faculty and staff, and Diversity and Inclusion Offices at local and regional colleges and universities along with historically Black colleges and universities.

We offer a base pay level for all roles that is competitive, market-based and re-evaluated on a recurring basis. The base pay is complemented by a matching 401(k) program, annual cash bonus and stock ownership opportunities along with healthcare benefits to provide a comprehensive compensation and benefits package. In addition, we have many special programs that appeal to associates while aligning with our corporate values. We believe our voluntary turnover rate indicates overall associate satisfaction with their working environment, compensation and benefits.

We strive to offer equal pay for equal work and use independent consultants to conduct gender and ethnic minority pay equity studies examining total direct compensation, which consists of base salary, cash bonus and equity awards. Using a multivariate regression analysis, the independent studies in 2020 showed that we administer pay fairly and equitably because the factors used to make compensation decisions, such as role, salary grade, tenure and performance do in fact drive compensation awarded to each associate. The studies also showed that there remains an adjusted gender pay gap of 1.0%, in favor of men, and an adjusted ethnic minority pay gap of 1.5%, in favor of ethnic minorities.

We offer all regular, full- and part-time associates the opportunity to participate in the CFC Savings Plan, our 401(k) plan. We also offer all full-time associates the opportunity to purchase health, prescription, vision and dental insurance. Associates enrolled in our health plan can receive a free biometric screening – either onsite at our headquarters or with their personal physician.

While providing stock compensation at all levels of an organization may not be a common business practice, we firmly believe that stock ownership helps drive good decision making and encourages a long-term view by associates. We historically grant annual stock-based compensation to full-time, salaried associates in the form of stock options and restricted stock units that vest over time. In addition, each year all regular, full-time associates – salaried and hourly – are awarded one share of stock for each full calendar year of service, up to 10 shares, through our Holiday Stock Plan.

Additional human capital information is available in our Environmental, Social and Governance Report available on the Sustainability page of our website, cinfin.com/sustainability.
Cincinnati Financial Corporation - 2020 10-K - Page 5



At year-end 2020, a select group of independent agencies in 45 states actively marketed our property casualty insurance within their communities. Standard market commercial lines and excess and surplus lines policies were marketed in 41 of those states. Personal lines policies were marketed in 43 of those states. Within our select group of agencies, we also seek to become the life insurance carrier of choice and to help agents and their clients – our policyholders – by offering leasing and financing services.
 
Three competitive advantages distinguish our company, positioning us to build shareholder value and to be successful overall:
Commitment to our professional independent insurance agencies and to their continued success
Financial strength to fulfill our promises and be a consistent market for our agents’ business, supporting stability and confidence
Operating structure that supports local decision making, showcasing our claims excellence and allowing us to balance growth with underwriting discipline

The primary sources of our company’s net income are summarized below. We discuss the contribution to net income from each source in Item 7, Corporate Financial Highlights of Management’s Discussion and Analysis.
Underwriting profit (loss) – Includes revenues from earned premiums for insurance and reinsurance policies or contracts, reduced by losses and loss expenses from associated insurance coverages. Those revenues are further reduced by underwriting expenses associated with marketing policies or related to administration of our insurance operation. The net result represents an underwriting profit when revenues exceed losses and expenses.
Investment income – Is generated primarily from investing the premiums collected for insurance policies sold, until funds are needed to pay losses for insurance claims or other expenses. Interest income from bond investments or dividend income from stock investments are the main categories of our investment income, with additional contribution from compounding effects over time.
Investment gains and losses – Occur from appreciation or depreciation of invested assets over time. Gains or losses are generally recognized from changes in market values of equity securities without a sale or when invested assets are sold or become impaired.

Cincinnati Financial Corporation - 2020 10-K - Page 6


Independent Insurance Agency Marketplace
The U.S. property casualty insurance industry is a highly competitive marketplace with more than 2,000 stock and mutual companies operating independently or in groups. No single company or group dominates across all product lines and states. Standard market insurance companies (carriers) can market a broad array of products nationally or:
choose to sell a limited product line or only one type of insurance (monoline carrier)
target a certain segment of the market (for example, personal insurance)
focus on one or more states or regions (regional carrier)

Standard market property casualty insurers generally offer insurance products through one or more distribution channels:
independent agents, who represent multiple carriers
captive agents, who represent one carrier exclusively
direct marketing to consumers

For the most part, we compete with standard market insurance companies that market through independent insurance agents. Agencies marketing our commercial lines or personal lines products typically represent several standard market insurance carriers, including both national and regional carriers, many which are mutual companies. We also compete with carriers that market personal lines products through captive agents and direct writers. Some of our agencies describe their roles as brokers instead of agents. Distribution through independent insurance agents or brokers represents nearly 60% of overall U.S. property casualty insurance premiums and approximately 80% of commercial property casualty insurance premiums, according to studies by the Independent Insurance Agents and Brokers of America.
 
We are fully committed to the independent agency channel for marketing our insurance policies, while Cincinnati Re typically markets through broker organizations or similar intermediaries that specialize in reinsurance. Cincinnati Global markets much of its business through coverholders, which are entities that help insurance companies with processes such as writing policies and collecting premiums. For marketing standard lines insurance products, we choose independent agencies that share our philosophies. They do business person to person; offer broad, value-added services; maintain sound balance sheets; and manage their agencies professionally, targeting long-term success. We develop our relationships with agencies that are active in their communities, providing important knowledge of local market trends, opportunities and challenges.

Our associates work to support agencies with tools and resources that help communicate the value of choosing an independent insurance agent and our insurance policies to their clients and prospective clients. We plan to build on our recent marketing efforts and continue with our national advertising campaign in 2021. Our intent is to increase the visibility of our company, supporting our agents' efforts as they recommend policies and services offered through The Cincinnati Insurance Companies. We also continue to build our social media presence, focusing on providing content that agents can share on their own sites.

We help our agencies meet the broader needs of their clients and increase and diversify their revenues and profitability by offering insurance solutions beyond our standard market property casualty insurance products. We market life insurance products through the agencies that offer our property casualty products and through other independent life agencies that represent Cincinnati Life without also representing our other subsidiaries. We operate our own excess and surplus lines insurance brokerage firm and insurance carrier so that we can offer our excess and surplus lines products exclusively to the independent agencies who market our other property casualty insurance products.

For our life insurance operation, property casualty agencies make up the main distribution system. To help that operation build scale, we also develop life insurance business from other independent life insurance agencies in geographic markets underserved through our property casualty agencies. We are careful to solicit business from these other agencies in a manner that does not compete with the life insurance marketing and sales efforts of our property casualty agencies. Cincinnati Life emphasizes up-to-date products, responsive underwriting, high-quality service and competitive pricing.

Cincinnati Financial Corporation - 2020 10-K - Page 7


Our excess and surplus lines insurance operation helps meet the specific insurance needs of certain agency clients. Generally, excess and surplus lines insurance carriers provide insurance that is unavailable in the standard market due to market conditions or characteristics of the insured persons or organizations that are caused by their nature, claim history or the characteristics of their business. Insurers operating in the excess and surplus lines marketplace generally market business through excess and surplus lines brokers, whether they are small specialty insurers or specialized divisions of larger insurance organizations. Agencies have access to Cincinnati Specialty Underwriters' product line through CSU Producer Resources, the wholly owned insurance brokerage subsidiary of Cincinnati Financial Corporation. By providing superior service, we can help our agencies grow while also profitably growing our property casualty insurance business.

The table below includes data about property casualty agency relationships that market our standard market insurance products. It does not include Lloyd's brokers or coverholders that source business for Cincinnati Global.
Agency DataYears ended December 31,
 20202019
Property casualty agency relationships, January 11,7961,757
New appointments that market all or most of The Cincinnati Insurance Companies' products133117
New appointments that market only personal lines insurance products for Cincinnati Insurance5870
Changes due to consolidation and other(139)(148)
Property casualty agency relationships, December 311,8481,796
Property casualty reporting locations2,5782,458
New relationship appointments119112
Active states4545

The annual total of agency new appointments may be partially offset by other changes in agency structures, such as consolidation through mergers or acquisitions. An increasing number of agencies have multiple, separately identifiable locations, reflecting their growth as well as consolidation of ownership within the independent agency marketplace. The number of reporting agency locations indicates our agents’ regional scope and the extent of our presence within our active states. The difference between new appointments in total and the number of new relationships represents either: new branch offices opened by existing Cincinnati agencies; or agencies that merged with another Cincinnati agency and we still believed would produce a meaningful amount of new business premiums.
 
On average, we have a 6.6% share of the standard lines property casualty insurance purchased through our reporting agency locations, according to 2019 data from agency surveys. Our share is 12.5% in reporting agency locations that have represented us for more than 10 years; 5.7% in agencies that have represented us for six to 10 years; 2.4% in agencies that have represented us for two to five years; and 0.3% in agencies that have represented us for one year or less.
 
Our largest single agency relationship accounted for approximately 1.3% of our total property casualty earned premiums in 2020. No aggregate locations under a single ownership structure accounted for more than 4% of our earned premiums in 2020.
 
Cincinnati Financial Corporation - 2020 10-K - Page 8


Financial Strength
We believe that our financial strength and strong capital and surplus position, reflected in our insurer financial strength ratings, are clear, competitive advantages in the segments of the insurance marketplace that we serve. This strength supports the consistent, predictable performance that our policyholders, agents, associates and shareholders have always expected and received, helping us withstand significant challenges.
 
While the potential exists for short-term financial performance variability due to our exposures to possible natural or man-made catastrophes or to significant capital market losses, the rating agencies consistently assert that we have built appropriate financial strength and flexibility to manage that variability. We remain committed to strategies that emphasize being a consistent, stable market for our agents’ business rather than seeking short-term benefits that might accrue by quick, opportunistic reaction to changes in market conditions.
 
We use various principles and practices such as diversification and enterprise risk management to maintain strong capital. For example, we maintain a diversified investment portfolio by reviewing and applying specific parameters and tolerances.
Our $12.338 billion fixed-maturity portfolio is diversified and exceeds total insurance reserves. The portfolio had an average rating of A3/A, and its fair value exceeded total insurance reserve liabilities by approximately 28% at December 31, 2020. No corporate bond exposure accounted for more than 0.7% of our fixed-maturity portfolio, and no municipal exposure accounted for more than 0.2%.
The strength of our fixed-maturity portfolio provides an opportunity to invest for potential capital appreciation by purchasing equity securities. Our $8.856 billion equity portfolio minimizes concentrations in single stocks or industries. At December 31, 2020, no single security accounted for more than 7.6% of our portfolio of publicly traded common stocks, and no single sector accounted for more than 29%.
Strong liquidity increases our flexibility through all periods to maintain our cash dividend and to continue to invest in and expand our insurance operations. At December 31, 2020, we held $3.916 billion of our cash and invested assets at the parent-company level, of which $3.686 billion, or 94.1%, was invested in common stocks, and $16 million, or 0.4%, was cash and cash equivalents.
 
We minimize reliance on debt as a source of capital, with a debt-to-total-capital ratio of 7.2% at year-end 2020. Long-term debt at year-end 2020 totaled $788 million, matching year-end 2019, and our short-term debt was $54 million, up from $39 million at the end of the prior year. The long-term debt consists of three nonconvertible, noncallable debentures, two due in 2028 and one in 2034. Ratings for our long-term debt are discussed in Item 7, Liquidity and Capital Resources, Long-Term Debt of Management’s Discussion and Analysis.
 
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At year-end 2020 and 2019, risk-based capital (RBC) for our standard market property casualty insurance, excess and surplus lines insurance and life insurance subsidiaries was strong, far exceeding regulatory requirements.
We ended 2020 with a 1.0-to-1 ratio of property casualty premiums to surplus, a key measure of property casualty insurance company capacity and security. A lower ratio indicates more security for policyholders and greater capacity for growth by an insurer. We believe our ratio provides ample flexibility to diversify risk by expanding our operations into new geographies and product areas. The estimated industry average ratio was 0.7-to-1 at year-end 2020.
We ended 2020 with a 7.1% ratio of life statutory adjusted risk-based surplus to liabilities, a key measure of life insurance company capital strength. A higher ratio indicates an insurer’s stronger security for policyholders and capacity to support business growth.
(Dollars in millions) Statutory Information
At December 31,
 20202019
Standard market property casualty insurance subsidiary  
Statutory capital and surplus$5,838 $5,620 
Risk-based capital5,860 5,654 
Authorized control level risk-based capital924 823 
Risk-based capital to authorized control level risk-based capital ratio6.3 6.9 
Written premium to surplus ratio1.0 1.0 
Excess and surplus lines insurance subsidiary  
Statutory capital and surplus$528 $526 
Risk-based capital528 526 
Authorized control level risk-based capital69 54 
Risk-based capital to authorized control level risk-based capital ratio7.7 9.8 
Written premium to surplus ratio0.7 0.6 
Life insurance subsidiary  
Statutory capital and surplus$241 $204 
Risk-based capital263 239 
Authorized control level risk-based capital58 53 
Total liabilities excluding separate account business3,723 3,643 
Risk-based capital to authorized control level risk-based capital ratio4.6 4.5 
Life statutory risk-based adjusted surplus to liabilities ratio7.1 6.6 
 
On a statutory consolidated property casualty insurance basis, the ratio of investments in common stock, at fair value, to statutory capital and surplus was 82.6% at year-end 2020 compared with 78.7% at year-end 2019.
 
Cincinnati Financial Corporation - 2020 10-K - Page 10


Cincinnati Financial Corporation’s senior debt is rated by four independent rating firms. In addition, the rating firms award our property casualty and life operations insurance financial strength ratings based on their quantitative and qualitative analyses. These ratings 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 shareholders. Ratings may be subject to revision or withdrawal at any time by the ratings agency, and each rating should be evaluated independently of any other rating.
 
At February 24, 2021, our insurance subsidiaries continued to be highly rated.
Insurer Financial Strength Ratings
Rating
agency
Standard market property
casualty insurance subsidiary
Life insurance
subsidiary
Excess and surplus lines
insurance subsidiary
Outlook
 Rating
Tier
Rating
Tier
Rating
Tier
A.M. Best Company
  ambest.com
A+Superior2 of 16A+Superior2 of 16A+Superior2 of 16Stable
Fitch Ratings
  fitchratings.com
A+Strong5 of 21A+Strong5 of 21---Stable
Moody's Investors
  Service
  moodys.com
A1Good5 of 21------Stable
S&P Global Ratings
  spratings.com
A+Strong5 of 21A+Strong5 of 21---Stable

On January 27, 2021, A.M. Best affirmed its ratings, continuing its stable outlook. On November 24, 2020, Fitch affirmed its ratings, continuing its stable outlook. On July 6, 2020, Moody's affirmed its ratings, returning its outlook to stable. On June 30, 2020, S&P affirmed its ratings, continuing its stable outlook.

Our debt ratings are discussed in Item 7, Liquidity and Capital Resources, Long-Term Debt of Management’s Discussion and Analysis.
 
Cincinnati Financial Corporation - 2020 10-K - Page 11


Operating Structure
We offer our broad array of insurance products through the independent agency distribution channel. We recognize that locally based independent agencies have relationships in their communities and local marketplace intelligence that can lead to profitable business and policyholder satisfaction and loyalty. Several of our strategic initiatives are intended not only to help us compete but also to enhance support of agencies that represent us, thereby contributing to agency success. We seek to be a consistent and predictable property casualty carrier that agencies can rely on to serve their clients.
 
In our 10 highest volume states for consolidated property casualty premiums, 1,316 reporting agency locations wrote 53.3% of our 2020 consolidated property casualty earned premium volume compared with 1,200 locations and 54.8% in 2019. We continue efforts to geographically diversify our property casualty risks.
 
Our 10 largest states based on property casualty premium volume, excluding Cincinnati Re and Cincinnati Global, are shown in the table below.
(Dollars in millions)Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
Year ended December 31, 2020    
Ohio$844 14.8 %251 $3.4 
Illinois310 5.4 165 1.9 
Georgia291 5.1 106 2.7 
North Carolina283 5.0 112 2.5 
Pennsylvania269 4.7 147 1.8 
Indiana258 4.5 114 2.3 
New York211 3.7 146 1.4 
Michigan199 3.5 137 1.5 
Tennessee193 3.4 66 2.9 
Virginia184 3.2 72 2.6 
 
Field Focus Emphasizing Service
We rely on our force of 1,849 field associates to provide service and be accountable to our agencies for decisions we make at the local level. These associates live in the communities our agents serve, so they are readily available when agencies or policyholders need them. While their work is often conducted at the premises of the agency or policyholder, they also work from offices in their homes. Headquarters associates support agencies and field associates with underwriting, accounting, technology assistance, training and other services. Company executives and headquarters associates typically travel to visit agencies, strengthening the personal relationships we have with these organizations. Agents have opportunities for direct, personal conversations with our senior management team, and headquarters associates have opportunities to refresh their knowledge of marketplace conditions and field activities.
 
The field team is coordinated by field marketing representatives responsible for underwriting new commercial lines business. They are joined by field representatives specializing in claims, loss control, commercial lines key accounts, personal lines, excess and surplus lines, machinery and equipment, management liability and surety, premium audit and life insurance. The field team provides a variety of services, such as recommending specific actions to improve the safety of the policyholder’s operations. We seek to develop long-term relationships by understanding the unique needs of each agency's clients, who are also our policyholders.
 
Technology enhances our service to agencies, allowing them to more easily access our systems and process business transactions. Policyholders can conveniently access pertinent policy information online, helping to reduce costs for agencies and the company. Technology and ongoing training also help our associates collaborate and process business efficiently, providing more time for personal service to agencies and their clients.

We also provide and continue to develop enhanced, tailored services offered at the time a claim is reported for an insured loss event. Those services include assisting with car rental or towing, arranging temporary housing and coordinating emergency repairs to homes so additional damage is minimized.
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Our claims philosophy reflects our belief that we prosper as a company by responding to claims person to person, paying covered claims promptly, preventing false claims from unfairly adding to overall premiums and building financial strength to meet future obligations.
 
Our 944 locally based field claims associates work from their homes and are assigned to specific agencies. They respond personally to policyholders and claimants and are equipped to handle a claim from nearly anywhere. We believe we have a competitive advantage because of the person-to-person approach and the resulting high level of service that our field claims representatives and Express Claims Center associates deliver. For field claims associates handling excess and surplus lines claims, guidance is provided by headquarters-based excess and surplus lines claims managers. Claims may be reported directly to us by calling our claims call center, online via our company website or through the MyCincinnati app using a mobile device.

Catastrophe response teams are comprised of our experienced field claims associates who have the authority they need to do their jobs. In times of widespread loss, our field claims representatives confidently and quickly resolve claims, with the ability to provide claims payments on the same day they inspect the loss. Technology helps to enable fast initial contact with policyholders and easy sharing of information and data among storm teams, headquarters associates and local field claims representatives. When hurricanes or other weather events are predicted, we can identify through mapping technologies the expected number of our policyholders that may be impacted by the event and choose to have catastrophe response team members travel to strategic locations near the expected impact area. They are then in position to quickly get to the affected area and begin providing service to policyholders.

Our 30 associates working in the Special Investigations Unit (SIU) include former law enforcement and claims professionals whose qualifications make them well suited to gathering facts to uncover potential fraud. While we believe our job is to pay what is due under each policy contract, we also want to prevent false claims from unfairly increasing overall premiums. Our SIU also operates a computer forensics lab that supports field investigation efforts in various ways including assistance with video evidence and data recovery.

We seek to attract and retain high-quality independent insurance agencies with knowledgeable, professional staffs. In turn, we make an exceptionally strong commitment to assist them in keeping their knowledge up to date and educating new people they bring on board as they grow. This includes offering classes, usually at no cost to agencies, except travel-related expenses they may incur, and other training support. We also offer noninsurance financial services. We believe that providing these services enhances agency relationships with the company and their clients, increasing loyalty while diversifying the agency’s revenues.
 
Cincinnati Financial Corporation - 2020 10-K - Page 13


Insurance Products
We provide well-designed property casualty and life insurance products to bring policyholders convenience, discounts and a reduced risk of coverage gaps or disputes. For most agencies that represent us, we believe we offer insurance solutions for approximately 75% of the typical insurable risks of their clients. Products for various business lines within our reporting segments include insurance coverages for business property and liability, automobiles and homes.

The following table shows net written premiums by segment and business line at year-end 2020, 2019 and 2018:
(Dollars in millions)202020192018Percent of total 2020
Segment:    
Commercial lines insurance$3,534 $3,410 $3,245 57.1 %
Personal lines insurance1,503 1,435 1,378 24.3 
Excess and surplus lines insurance348 303 249 5.6 
Life insurance328 318 298 5.3 
Other479 368 158 7.7 
Total$6,192 $5,834 $5,328 100.0 %
    
Business line:    
Commercial lines insurance:
Commercial casualty$1,205 $1,131 $1,080 19.5 %
Commercial property1,019 985 932 16.5 
Commercial auto763 735 682 12.3 
Workers' compensation266 294 311 4.3 
Other commercial281 265 240 4.5 
Total commercial lines insurance3,534 3,410 3,245 57.1 
Personal lines insurance:    
Personal auto611 620 622 9.9 
Homeowner693 631 588 11.2 
Other personal199 184 168 3.2 
Total personal lines insurance1,503 1,435 1,378 24.3 
Excess and surplus lines insurance348 303 249 5.6 
Life insurance:
Term life insurance202 196 181 3.3 
Universal life insurance34 37 44 0.5 
Other life insurance and annuity products92 85 73 1.5 
Subtotal328 318 298 5.3 
Other479 368 158 7.7 
Total$6,192 $5,834 $5,328 100.0 %

We discuss our insurance segments in their respective sections later in this report.

Cincinnati Financial Corporation - 2020 10-K - Page 14


Strategic Initiatives to Manage Insurance Profitability and Drive Premium Growth
Management has identified a strategy that can position us for long-term success. The board of directors and management expect execution of our strategic plan to create significant value for shareholders over time. We broadly group key strategic initiatives into two areas of focus – managing insurance profitability and driving premium growth. These areas correlate with how we measure progress toward our long-term financial objectives. Our strategic priorities include meeting the wants and needs of our agent customers, attracting and developing talented associates, providing comprehensive product solutions, achieving best-in-class field service and continually enhancing operational efficiency and effectiveness. We believe successful execution of our long-term strategy and related shorter-term initiatives will help us achieve our long-term objectives despite potential unfavorable shorter-term effects of difficult economic, market or pricing cycles. We describe our expectations for the results of these initiatives in Item 7, Executive Summary of Management's Discussion and Analysis.

Effective capital management is an important part of creating long-term shareholder value, serving as a foundation to support other strategic areas focused on profitable growth of our insurance business. Our capital management philosophy is intended to preserve and build our capital while maintaining appropriate liquidity. A strong capital position provides the capacity to support premium growth, and liquidity provides for our investment in the people and infrastructure needed to implement our strategic initiatives. Our strong capital and liquidity also provide financial flexibility for shareholder dividends or other capital management actions.

We continue to enhance our property casualty underwriting expertise, including ongoing training for associates and providing them with additional technology, 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. Expansion of risk management and loss control programs aim to further improve results for our commercial lines insurance segment, while enhanced pricing precision tools to additional states for our personal lines insurance segment can also improve profitability.

We take ongoing actions intended to improve efficiency and make it easier for agencies and their clients to do business with us. In addition to benefiting agencies we serve, improved processes support our strategy, helping to more quickly deploy product or service enhancements. They also help reduce internal costs and allow us to focus more resources on agency services and on providing local, individualized insurance solutions for small businesses and other agency clients. Initiatives include continuing to enhance the experiences of agencies and policy consumers through customer engagement as we provide convenient policy information for billing, claims and other areas. Other ongoing initiatives aim for continuous improvement of workflow tools and processes for underwriters. To help guide our strategic efforts, we have placed an emphasis on innovation to accelerate improvement and to also favorably position us for the future. We find innovative ideas in many places, including: internally through management and other associates, with our traditional business partners and in the start-up business community.

We also seek to further penetrate insurance markets as we strive to be the best company serving independent insurance agencies. Initiatives aimed at specific market opportunities or designed to enhance service can help our agents to grow and to increase our share of their business. We continue to increase our capabilities to successfully underwrite both larger policies, which we refer to as key accounts, or small business accounts that require greater efficiency. Our growth plans incorporate general business statistics and historical profitability trends to estimate premium growth from existing agencies and to make careful projections to assess the number of additional agencies needed. Our focus remains on key components of agent satisfaction based on factors that agents tell us are most important. This includes increasing opportunities for agencies to cross-serve their clients by providing updated products and services that aim to meet their life insurance needs.

We continue to appoint new agencies to develop additional points of distribution. In 2021, we are planning approximately 120 appointments of independent agencies that offer most or all of our property casualty insurance products. We generally earn a 10% share of an agencys business within 10 years of its appointment. See Item 1, Our Business and Our Strategy, Independent Insurance Agency Marketplace, for additional discussion.
 
Cincinnati Financial Corporation - 2020 10-K - Page 15


Our Segments
Consolidated financial results primarily reflect the results of our five reporting segments. These segments are defined based on financial information we use to evaluate performance and to determine the allocation of assets.
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Life insurance
Investments
Revenues, income before income taxes and identifiable assets for each segment are shown in Item 8, Note 18 of the Consolidated Financial Statements. Some of that information is discussed in this section, where we explain the business operations of each segment. The financial performance of each segment is discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Cincinnati Financial Corporation - 2020 10-K - Page 16


Commercial Lines Insurance Segment
In 2020, the commercial lines insurance segment contributed net earned premiums of $3.476 billion, representing 46.1% of consolidated total revenues. This segment reported profit before income taxes of $64 million. Commercial lines net earned premiums rose 5% in 2020 and 3% in 2019.
 
We believe that our commercial lines business is best measured and evaluated on a segment basis. However, we also provide selected line of business data to summarize growth and profitability trends separately for our business lines. The five commercial business lines are:
Commercial casualty – Provides coverage to businesses against third-party liability from accidents occurring on their premises or arising out of their operations, including injuries sustained from products or liability related to professional services. Specialized casualty policies may include similar coverage such as umbrella liability or employment practices. The commercial casualty business line includes liability coverage written as part of commercial package policies.
Commercial property – Provides coverage for loss or damage to buildings, inventory and equipment caused by covered causes of loss such as fire, wind, hail, water, theft and vandalism, as well as business interruption resulting from a covered loss. Commercial property also includes other coverages such as inland marine, which covers losses related to builder’s risk, cargo or equipment. Various property coverages can be written as stand-alone policies or can be added to a commercial package policy.
Commercial auto – Protects businesses against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicles, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists.
Workers’ compensation – Covers employers for government-specified benefits from work-related injuries to employees.
Other commercial lines – This includes several other types of insurance products for businesses, including:
Management liability and surety – Includes director and officer (D&O) liability insurance, which covers liability for actual or alleged errors in judgment, breaches of duty or other wrongful acts related to activities of organizations and can optionally include other liability coverages. We market primarily to nonprofit organizations, privately held businesses, healthcare organizations, financial institutions and educational institutions. The for-profit portion includes approximately 160 bank or savings and loan financial institutions, with none having assets of $1 billion or more. The surety portion includes contract and commercial surety bonds for losses resulting from dishonesty, failure to perform and other acts and also includes fidelity bonds for fraudulent acts by specified individuals or dishonest acts by employees.
Machinery and equipment – Specialized coverage provides protection for loss or damage to boilers and machinery, including production and computer equipment and business interruption, due to sudden and accidental mechanical breakdown, steam explosion or artificially generated electrical current.

Our history of emphasizing products and services that agencies can market to small or midsized businesses in their communities remains a critical piece of our strategy even as we expand our appetite to insure larger businesses. While some of our property casualty agencies market only our personal lines or management liability and surety products, approximately 85% offer some or all of our standard market commercial insurance products.
 
Cincinnati Financial Corporation - 2020 10-K - Page 17


In 2020, our 10 highest volume commercial lines states generated 57.1% of our earned premiums compared with 58.4% in 2019. The aggregate number of reporting agency locations in our 10 highest volume states increased to 1,150 in 2020 from 1,138 in 2019.

Our 10 largest states based on commercial lines premium volume are shown in the table below.
(Dollars in millions)Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
Year ended December 31, 2020    
Ohio$509 14.6 %242 $2.1 
Pennsylvania214 6.2 135 1.6 
Illinois213 6.1 149 1.4 
North Carolina187 5.4 109 1.7 
Indiana177 5.1 110 1.6 
Georgia153 4.4 95 1.6 
Virginia144 4.1 66 2.2 
Tennessee138 4.0 65 2.1 
Michigan132 3.8 129 1.0 
Missouri120 3.4 50 2.4 
 
For new commercial lines business, case-by-case underwriting and pricing is coordinated by our locally based field marketing representatives who are also responsible for selecting new independent agencies. Our agents and our team of field associates get to know the people and businesses in their communities and can make informed decisions about each risk.
 
Commercial lines policy renewals are managed by headquarters underwriters who are assigned to specific agencies and consult with local field associates as needed. As part of our team approach, headquarters underwriters also help oversee agency growth and profitability. They are responsible for formal issuance of all new business and renewal policies as well as policy endorsements. Further, the headquarters underwriters provide day-to-day customer service to agencies and our field marketing representatives by offering product training, answering underwriting questions, helping to determine underwriting eligibility and assisting with the mechanics of premium determination. We also continue a target markets emphasis to analyze opportunities and to develop new products and services, new coverage options and improvements to existing insurance products.
 
Understanding evolving market conditions is a critical function for our success, accomplished through both informal commentary and formal reviews. Informally, our field marketing representatives, underwriters and product development associates routinely receive market intelligence from a variety of channels, including from the agencies with which they work. This market information helps identify the top competitors and our market strengths and weaknesses. The information obtained encompasses pricing, breadth of coverage and use of underwriting guidelines.

Our historical emphasis on small to midsized businesses is reflected in the mix of our commercial lines premium volume by policy size. Approximately 75% of our commercial in-force policies have annual premiums of $10,000 or less, accounting in total for approximately 20% of our 2020 commercial lines premium volume. The remainder of policies have annual premiums greater than $10,000, including policies with annual premiums greater than $100,000 that account for approximately 30% of our 2020 commercial lines premium volume. Our average commercial lines policy size is approximately $13,000 in annual premiums.
 
Our commercial lines packages typically are offered on a three-year policy term for most insurance coverages – a key competitive advantage. In our experience, multi-year packages appeal to the quality-conscious insurance buyers who we believe are typical clients of our independent agents. Customized insurance programs on a three-year term complement the long-term relationships these policyholders typically have with their agents and with our company. By reducing annual administrative efforts, multi-year policies lower expenses for our company and for our agents. The commitment we make to policyholders encourages long-term relationships and reduces their need to annually re-evaluate their insurance carrier or agency. We believe that the advantages of three-year policies in
Cincinnati Financial Corporation - 2020 10-K - Page 18


terms of improved policyholder convenience, increased account retention and reduced administrative costs outweigh the potential disadvantage of these policies, even in periods of rising rates.
 
Although we offer three-year policy terms, premiums for some coverages within those policies are adjustable at the anniversary for the next annual period, and policies may be canceled at any time at the discretion of the policyholder. Contract terms often provide that rates for property, general liability, inland marine and crime coverages, as well as policy terms and conditions, are fixed for the term of the policy. However, the exposure we insure is reviewed annually, near the policy anniversary date, and the amount of premiums may be adjusted based on changes to that exposure.
 
The general liability exposure basis may be audited annually. Commercial auto, workers’ compensation, professional liability and most umbrella liability coverages within multi-year packages are rated at each of the policy’s annual anniversaries for the next one-year period. The annual pricing could incorporate rate changes approved by state insurance regulatory authorities between the date the policy was written and its annual anniversary date, as well as changes in risk exposures and premium credits or debits relating to loss experience and other underwriting judgment factors. We estimate that approximately 75% of 2020 commercial premiums were subject to annual rating or were written on a one-year policy term. That 75% includes approximately one-third of policies offered on a three-year policy term that expire during any given year.
 
We believe our commercial lines insurance segment premiums reflect a higher concentration, relative to industry commercial lines premiums, in contractor-related businesses. Since economic activity related to construction, which can heavily influence insured exposures of contractors, may experience cycles that vary significantly with the economy as a whole, our commercial lines premium trends could vary from commercial lines premium trends for the property casualty insurance industry. In 2020, we estimated that 39% of our general liability premiums, and 36% of our workers’ compensation premiums, came from the construction industry based on North American Industry Classification System (NAICS) codes.
 
Cincinnati Financial Corporation - 2020 10-K - Page 19


Personal Lines Insurance Segment
The personal lines insurance segment contributed net earned premiums of $1.463 billion to 2020 consolidated total revenues, or 19.4% of the total, and reported profit before income taxes of $47 million. Personal lines net earned premiums rose 4% in 2020 and 5% in 2019.
 
We prefer to write personal lines coverage in accounts that include both auto and homeowner coverages as well as coverages that are part of our other personal business line. At the end of 2020, for example, approximately 83% of our homeowner policies were accompanied by a personal auto policy in the same account. As a result of our account-based approach, we believe that our personal lines business is best measured and evaluated on a segment basis. However, we provide line of business data to summarize growth and profitability trends separately for three business lines:
Personal auto – Protects against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicle, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists. In addition, many states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage.
Homeowner – Protects against losses to dwellings and contents from a wide variety of perils, as well as liability arising out of personal activities both on and off the covered premises. We also offer coverage for condominium unit owners and renters.
Other personal lines – This includes the other types of insurance products we offer to individuals, including dwelling fire, inland marine, personal umbrella liability and watercraft coverages.

At year-end 2020, we marketed personal lines insurance products through 1,854, or approximately 72%, of our 2,578 agency reporting locations. The 1,854 personal lines agency locations were in 43 of the 45 states in which we offered property casualty insurance. Those agencies produced approximately 1.0 million personal lines policies in force for us, representing approximately 385,000 policyholders.

We continue to evaluate opportunities to expand our marketing of personal lines to other states. Primary factors considered in the evaluation of a potential new state include market opportunity or potential, weather-related catastrophe history and the legal climate.

Expansion of our personal lines insurance segment includes marketing through independent agencies to profitably grow our premiums for products and services offered to their high net worth personal lines clients. In 2020, our appointed agencies produced for us approximately $520 million of net written premiums from policyholders with insured home values of $1 million or more, up 27% from 2019. We estimate those policyholders represent approximately 15% of our total personal lines policyholders.
 
In 2020, we expanded our excess and surplus lines business into personal lines by offering an excess and surplus lines homeowner policy in California through our wholly owned insurance broker, CSU Producer Resources Inc. We see this expansion as a natural evolution of our agency-focused strategy, as some agents need a solution to serve clients who have attractive high net worth personal lines accounts that are not eligible for admitted insurance market coverage. In 2020, our appointed agencies produced $8 million of net written premiums through excess and surplus lines homeowner policies.

Cincinnati Financial Corporation - 2020 10-K - Page 20


In 2020, our 10 highest volume personal lines states generated 65.2% of our earned premiums compared with 66.7% in 2019. In 2015, our 10 highest volume personal lines states generated 78.5% of our earned premiums. The reduction in that percentage indicates progress over time toward our long-term objective of geographic diversification through new states for our personal lines operation. The aggregate number of reporting agency locations in our 10 highest volume states increased to 957 in 2020 from 933 in 2019.
 
Our 10 largest states based on personal lines premium volume are shown in the table below.
(Dollars in millions)Earned
premiums
% of total
earned
Agency
locations
Average
premium per
location
Year ended December 31, 2020    
Ohio$311 21.2 %224 $1.4 
Georgia121 8.2 90 1.3 
New York80 5.5 95 0.8 
North Carolina78 5.3 89 0.9 
Illinois73 5.0 114 0.6 
Indiana67 4.6 90 0.7 
Alabama65 4.5 48 1.4 
Michigan57 3.9 98 0.6 
California52 3.6 57 0.9 
Kentucky50 3.4 52 1.0 
 
New and renewal personal lines business reflects our risk-specific underwriting philosophy. Each agency selects personal lines business primarily from within the geographic territory that it serves, based in part on agency staff’s knowledge of the risks in those communities or familiarity with the policyholder. We have personal lines field marketing representatives who have underwriting authority and visit agencies on a regular basis. They focus primarily on key states targeted for growth, reinforcing the advantages of our personal lines products and offering training in the use of our policy processing system. Personal lines activities are further supported by headquarters associates assigned to individual agencies.
 
Cincinnati Financial Corporation - 2020 10-K - Page 21


Excess and Surplus Lines Insurance Segment
The excess and surplus lines segment contributed net earned premiums of $325 million to 2020 consolidated total revenues, or 4.3% of the total, and reported profit before income taxes of $34 million. Excess and surplus lines net earned premium increased 17% in 2020 and 19% in 2019.
 
Our excess and surplus lines policies typically cover business risks with unique characteristics, such as the nature of the business or its claim history, that are difficult to profitably insure in the standard commercial lines market. Excess and surplus lines insurers have more flexibility in coverage terms and rates compared with standard lines companies, generally resulting in policies with higher rates and terms and conditions customized for specific risks, including restricted coverage where appropriate. We target small to midsized risks, and policyholders in many cases also have standard market insurance with one of our other subsidiaries. Our average excess and surplus lines policy size is approximately $7,000 in annual premiums, and the majority have coverage limits of $1 million or less. All of our excess and surplus lines policies are written for a maximum term of one year. Approximately 90% of our 2020 earned premiums for the excess and surplus lines insurance segment provided commercial casualty coverages and about 10% provided commercial property coverages. Those coverages are described below.
Commercial casualty – Covers businesses for third-party liability from accidents occurring on their premises or arising out of their operations, including injuries sustained from products. Other coverages available include miscellaneous errors and omissions, professional liability and excess liability. Typical businesses covered include contractors, manufacturers, real estate owners and managers, retail, consultants, and bars or taverns. Policies covering liability at special events are also available.
Commercial property – Insures buildings, inventory, equipment and business income from loss or damage due to causes such as fire, wind, hail, water, theft and vandalism. Examples of property we commonly insure with excess and surplus lines policies include temporarily vacant buildings, habitational, restaurants and relatively higher-hazard manufacturing classes.

At the end of 2020, we marketed excess and surplus lines insurance products in each of the 41 states in which we offer standard market commercial lines insurance. Offering excess and surplus lines helps agencies representing The Cincinnati Insurance Companies meet the insurance needs of their clients when coverage is unavailable in the standard market. By providing outstanding service, we can help agencies grow and prosper while also profitably growing our property casualty business.
 
In 2020, our 10 highest volume excess and surplus lines states generated 55.0% of our earned premiums, compared with 56.8% in 2019.
 
Our 10 largest states based on excess and surplus lines premium volume are shown in the table below.
(Dollars in millions)Earned
premiums
% of total
earned
Year ended December 31, 2020  
Ohio$25 7.6 %
Illinois24 7.4 
Texas21 6.4 
Georgia18 5.4 
North Carolina17 5.4 
Pennsylvania17 5.3 
New York15 4.6 
Indiana14 4.4 
Florida14 4.3 
Alabama14 4.2 
 
Cincinnati Financial Corporation - 2020 10-K - Page 22


Agencies representing The Cincinnati Insurance Companies produce approximately $5 billion in annual premiums for all carriers writing excess and surplus lines policies for their clients. We estimate that approximately half of that premium volume matches the targeted business types and coverages we offer through our excess and surplus lines insurance segment. We structured the operations of this segment to meet the needs of these agencies and to market exclusively through them.
 
Agencies have access to Cincinnati Specialty Underwriters' product line through CSU Producer Resources, the wholly owned insurance brokerage subsidiary of Cincinnati Financial Corporation. CSU Producer Resources has binding authority on all classes of business written through Cincinnati Specialty Underwriters and maintains appropriate agent and surplus lines licenses.
 
We seek to earn a share of each agency’s best excess and surplus lines accounts by offering several unique benefits. Agency producers have direct access through CSU Producer Resources to a group of our underwriters who focus exclusively on excess and surplus lines business. Those underwriters can tap into broader services we offer to provide policyholders additional value and help producers build the relationship through experienced and responsive loss control services and claims handling. CSU Producer Resources gives extra support to our independent agency producers by remitting surplus lines taxes and stamping fees and retaining admitted market diligent search affidavits, where required. Agencies marketing through CSU Producer Resources instead of a competing brokerage generally receive a higher commission because use of our internal brokerage subsidiary eliminates some of the intermediary costs. This business is factored in their profit-sharing agreement with The Cincinnati Insurance Companies. We also offer prompt service, generally issuing approximately 95% of policies within 24 hours of a request to bind a policy.
 
Cincinnati Financial Corporation - 2020 10-K - Page 23


Life Insurance Segment
The life insurance segment contributed $289 million of net earned premiums, representing 3.8% of 2020 consolidated total revenues, and reported a profit before income taxes of $11 million. Life insurance net earned premiums grew 7% in 2020 and 8% in 2019.
 
The Cincinnati Life Insurance Company supports our agency-centered business model by deepening the relationships we have with agents while also diversifying revenue and profitability for both the agency and our company. We primarily focus on life products that feature a steady stream of premium payments and that have the potential for generating revenue growth through increasing demand.
 
Life Insurance Business Lines
Four lines of business that account for approximately 99% of the life insurance segment’s revenues are:
Term life insurance – Policies under which a death benefit is payable only if the insured dies during a specific period of time. Policy options include a return of premium provision, a benefit equal to the sum of all paid base premiums that is payable if the insured person survives to the end of the term. The policies are fully underwritten using traditional and accelerated methods.
Universal life insurance – Long-duration life insurance policies that are fully underwritten. Contract premiums are neither fixed nor guaranteed; however, the contract does specify a minimum interest crediting rate and a maximum cost of insurance charge and expense charge. The cash values, available as loans collateralized by the cash surrender value, are not guaranteed and depend on the amount and timing of actual premium payments and the amount of actual contract assessments.
Worksite products – Term life insurance, return of premium term life insurance and whole life insurance offered to employees through their employer. Premiums are collected by the employer using payroll deduction. Policies are issued using a simplified underwriting approach and on a guaranteed issue basis. Worksite insurance products provide our property casualty agency force with excellent cross-serving opportunities for both commercial and personal accounts.
Whole life insurance – Policies that provide life insurance for the entire lifetime of the insured. The death benefit is guaranteed never to decrease and premiums are guaranteed never to increase. While premiums are fixed, they must be paid as scheduled. These policies provide guaranteed cash values that are available as loans collateralized by the cash surrender value. The policies are fully underwritten.

In addition, Cincinnati Life markets:
Deferred annuities that provide regular income payments that commence after the end of a specified period or when the annuitant attains a specified age. During the deferral period, any payments made under the contract accumulate at the crediting rate declared by the company but not less than a contract-specified guaranteed minimum interest rate. A deferred annuity may be surrendered during the deferral period for a cash value equal to the accumulated payments plus interest less the surrender charge, if any.
Immediate annuities that provide some combination of regular income and lump-sum payments in exchange for a single premium.

Cincinnati Financial Corporation - 2020 10-K - Page 24


Life Insurance Distribution
Cincinnati Life is licensed in 49 states and the District of Columbia. At year-end 2020, approximately 78% of our 1,848 property casualty agency relationships offered Cincinnati Life products to their clients. We also develop life business from approximately 389 other independent life insurance agencies. We are careful to solicit business from these other agencies in a manner that does not conflict with or compete with the marketing and sales efforts of our property casualty agencies.
 
When marketing through our property casualty agencies, we have specific competitive advantages:
Because our property casualty operations are held in high regard, property casualty agency management is predisposed to consider selling our life products.
Marketing efforts for both our property casualty and life insurance businesses are directed by our field marketing department, coordinated with our life field marketing representatives, which assures consistency of communication and operations. Life field marketing representatives are available to meet face-to-face with agency personnel and their clients as well. Our life headquarters underwriters and other associates are available to the agents and field team to assist in the placement of business.

We continue to emphasize the cross-serving opportunities of our life insurance, including term and worksite products, for the property casualty agency’s personal and commercial accounts. In both the property casualty and independent life agency distribution systems, we enjoy the advantages of offering competitive, up-to-date products and providing personal attention in combination with financial strength and stability.
Term life insurance is our largest life insurance product line. We continue to develop and offer term products with features our agents indicate are important, such as a return of premium benefit and an option for an accelerated underwriting product for our personal lines agents.
We also offer products addressing the needs of businesses with key person and buy-sell coverages. We offer quality, personal life insurance coverage to personal and commercial clients of our agencies.
Because of our strong capital position, we can offer a competitive product portfolio, including guaranteed products, giving our agents a marketing edge. Our life insurance company maintains strong insurer financial strength ratings: A.M. Best, A+ (Superior); Fitch, A+ (Strong); and S&P, A+ (Strong). Our life insurance company has chosen not to establish a Moody’s rating.
 
In 2020, our five highest volume states for life insurance premiums, based on information contained in statements filed with state insurance departments, are shown in the table below.
(Dollars in millions)Premiums% of total
Year ended December 31, 2020  
Ohio$56 16.4 %
Pennsylvania24 7.0 
Illinois21 6.0 
Indiana20 5.8 
Georgia18 5.1 

Cincinnati Financial Corporation - 2020 10-K - Page 25


Investments Segment
Revenues of the investments segment are primarily from net investment income and from net investment gains and losses from investment portfolios managed for the holding company and each of the operating subsidiaries.
 
Our investment department operates under risk guidelines set forth in our investment policy along with oversight of the investment committee of our board of directors. These guidelines set parameters for risk tolerances governing, among other items, the allocation of the portfolio as well as security and sector concentrations. These parameters are part of an integrated corporate risk management program. When allocating cash to various asset classes, we consider market-based factors such as risk adjusted after-tax yields as well as internal measures based in part on insurance department regulations and rating agency guidance.
 
The fair value of our investment portfolio was $21.194 billion and $19.450 billion at year-end 2020 and 2019, respectively, as shown in the table below. The overall portfolio increased, reflecting an unrealized gain position and fair value increase. The fair value increased largely due to equity markets that rose during the second half of 2020 after declining for much of the first half of the year. The unrealized gain position in our fixed-maturity investments increased in 2020, primarily due to a decrease in interest rates such as U.S. Treasury yields.
(Dollars in millions)At December 31, 2020At December 31, 2019
 Cost or amortized costPercent of total Percent of totalCost or amortized costPercent of total Percent of total
 Fair valueFair value
Taxable fixed maturities$7,363 48.3 %$8,053 38.0 %$7,250 49.4 %$7,617 39.1 %
Tax-exempt fixed maturities3,949 25.9 4,285 20.2 3,858 26.3 4,081 21.0 
Common equities3,640 23.9 8,541 40.3 3,371 22.9 7,518 38.7 
Nonredeemable preferred
equities
287 1.9 315 1.5 210 1.4 234 1.2 
Total$15,239 100.0 %$21,194 100.0 %$14,689 100.0 %$19,450 100.0 %
 
The cash we generate from insurance operations historically has been invested in two broad categories of investments:
Fixed-maturity investments – Includes taxable and tax-exempt bonds and redeemable preferred stocks. During 2020, the combined effect of net purchases and a net increase in unrealized gains offset sales and calls of fixed-maturity securities in our portfolio. During 2019, purchases and a net increase in unrealized gains offset sales and calls.
Equity investments – Includes common and nonredeemable preferred stocks. During 2020, the combined effect of purchases and a net increase in fair value offset sales of equity securities in our portfolio. During 2019, purchases and a net increase in fair value offset sales.
 
In addition to securities held in our investment portfolio, other invested assets included $162 million held on deposit at Lloyd's, $128 million of private equity investments, $33 million of life policy loans and $25 million of real estate through direct property ownership and development projects in the United States at year-end 2020.

Our investment portfolio is further described below. Additional information about the composition and valuation of investments is included in Item 8, Note 2, Investments, and Note 3, Fair Value Measurements, of the Consolidated Financial Statements. A detailed listing of our portfolio is updated on our website, cinfin.com/investors, each quarter when we report our quarterly financial results.

Fixed-Maturity Securities Investments
By maintaining a well-diversified fixed-maturity portfolio, we attempt to manage overall interest rate, reinvestment, credit and liquidity risk. We pursue a buy-and-hold strategy and do not attempt to make large-scale changes to the portfolio in anticipation of rate movements. By investing new money on a regular basis and analyzing risk-adjusted after-tax yields, we work to achieve a general laddering effect to our portfolio that may mitigate some of the effects of adverse interest rate movements.
 
Cincinnati Financial Corporation - 2020 10-K - Page 26


At December 31, 2020, our investment-grade and noninvestment-grade fixed-maturity securities represented 81.8% and 4.0% of the portfolio, respectively. The remaining 14.2% represented fixed-maturity securities that were not rated by Moody’s or S&P. Our nonrated securities include smaller municipal issues and private placement corporate securities. Many of these, although not rated by Moody’s or S&P, are rated by the Securities’ Valuation Office of the National Association of Insurance Commissioners (NAIC). Also included in this category are smaller public corporate securities, many of which carry a rating by an agency other than Moody’s or S&P, such as Fitch or Kroll.

Other selected attributes of the fixed-maturity portfolio are shown in the table below. Additional maturity periods and other information for our fixed-maturity portfolio are shown in Item 8, Note 2 of the Consolidated Financial Statements.
 At December 31,
 20202019
Weighted average yield-to-amortized cost4.12 %4.10 %
Weighted average maturity7.5 yrs7.7 yrs
Effective duration4.5 yrs4.8 yrs
 
The fair values of our taxable fixed-maturity securities portfolio at the end of the last two years were:
(Dollars in millions)At December 31,
 20202019
Investment-grade corporate$6,416 $6,137 
States, municipalities and political subdivisions712 647 
Noninvestment-grade corporate479 264 
Commercial mortgage-backed285 301 
United States government120 104 
Foreign government29 28 
Government-sponsored enterprises12 136 
Total$8,053 $7,617 
 
While our strategy typically is to buy and hold fixed-maturity investments to maturity, we monitor credit profiles and fair value movements when determining holding periods for individual securities. With the exception of U.S. agency issues, no individual issuer's securities accounted for more than 1.1% of the taxable fixed-maturity portfolio at year-end 2020. Investment-grade corporate bonds had an average rating of Baa2 by Moody’s or BBB by S&P at year-end 2020. Our taxable fixed-maturity portfolio included $285 million of commercial mortgage-backed securities with an average rating of Aa1/AA at year-end 2020.
 
Relative to a broad bond market index such as the Barclay’s Aggregate, we are most heavily exposed to the investment grade corporate bond asset class. Within that asset class, we have a weighting of 46.2% for the financial sector, higher than the 31.0% weighting for the financial sectors of the Bank of America Merrill Lynch U.S. Corporate Index. Relative to the Barclay’s Aggregate, we are overweight in the commercial mortgage-backed securities asset class while having no exposure to the much larger residential mortgage-backed market.
 
At December 31, 2020, we had $4.285 billion of tax-exempt fixed-maturity securities with an average rating of Aa2/AA by Moody’s and S&P. The portfolio is well diversified among approximately 1,700 municipal bond issuers. No single municipal issuer accounted for more than 0.6% of the tax-exempt fixed-maturity portfolio at year-end 2020.
 
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Equity Securities Investments
After covering both our intermediate and long-range insurance obligations with fixed-maturity investments, we historically have used some available cash flow to invest in equity securities. Our equity securities portfolio includes common stocks and nonredeemable preferred stocks. Investment in equity securities has played an important role in achieving our portfolio objectives and has contributed to both growth of investment income and portfolio appreciation. We remain committed to our long-term equity focus, which we believe is key to our company’s long-term growth and stability. We believe our strategy of primarily investing in a diversified selection of larger-capitalization, high-quality, dividend-increasing companies generally results in reduced volatility relative to the broader equity markets.
 
For federal income tax purposes, taxes on gains from appreciated investments generally are not due until securities are sold. We believe that the appreciated value of equity securities, compared with the cost of securities that is generally used as a tax basis, is a useful measure to help evaluate how fair value can change over time. On this basis, the net unrealized investment gains at year-end 2020 consisted of a net gain position in our equity portfolio of $4.929 billion. Events or factors such as economic growth or recession can affect the fair value of our equity securities.

At year-end 2020, Apple Inc. (Nasdaq:AAPL) was our largest single common stock investment, comprising 7.5% of our publicly traded common stock portfolio and 3.0% of the entire investment portfolio. The parent company held 43.2% of our common stock holdings (measured by fair value). The distribution of the portfolio among industry sectors is shown in the table below.
 
Common Stock Portfolio Industry Sector Distribution
 Percent of common stock portfolio
 At December 31, 2020At December 31, 2019
 Cincinnati
Financial
S&P 500 Industry
Weightings
Cincinnati
Financial
S&P 500 Industry
Weightings
Sector:    
Information technology28.3 %27.6 %23.7 %23.2 %
Financial14.2 10.4 15.7 13.0 
Healthcare13.3 13.5 12.4 14.2 
Industrials12.3 8.4 12.6 9.1 
Consumer discretionary8.9 12.7 9.7 9.7 
Consumer staples6.7 6.5 6.2 7.2 
Materials5.1 2.6 5.0 2.7 
Energy3.8 2.3 6.3 4.3 
Real estate2.7 2.4 2.5 2.9 
Utilities2.6 2.8 2.5 3.3 
Telecomm services2.1 10.8 3.4 10.4 
Total100.0 %100.0 %100.0 %100.0 %
 
We evaluate nonredeemable preferred stocks in a manner similar to our evaluation of fixed-maturity investments, seeking attractive relative yields. We generally focus on investment-grade nonredeemable preferred stocks issued by companies with strong histories of paying common dividends, providing us with another layer of protection. Consideration is also given to nonredeemable preferred stocks that offer a dividend received deduction for income tax purposes. During 2020, we purchased $79 million of nonredeemable preferred stocks and none in this portfolio were converted to common stock. During 2019, we purchased $40 million of nonredeemable preferred stocks and none in this portfolio were converted to common stock.
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Other
What we report as Other includes the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. At year-end 2020, this subsidiary had $95 million in receivables related to its commercial leasing and financing services, compared with $77 million in receivables at year-end 2019.

We also report as Other the results of Cincinnati Re, which has contracts, also referred to as treaties, with other insurance or reinsurance companies to assume a portion of their insured risk in exchange for a portion of premiums from insurance policies covering those risks. The treaties and their exposure to losses are diverse in nature, including various lines of business and geographies for the reinsured risks. Some of our treaties reflect a type of contract commonly referred to as participating or proportional, typically sharing premiums and losses between the reinsured entity and us, as reinsurer, on a pro rata basis. Some are a contract type commonly referred to as excess of loss, where we indemnify the reinsured entity only for losses exceeding a predetermined amount.

Net written premiums for Cincinnati Re totaled $302 million in 2020, compared with $228 million in 2019. Approximately 33% of 2020 net written premiums was for property exposures that include risk of loss from natural catastrophes and approximately 51% was for casualty exposures from various liability risks. The remainder of approximately 16% was a combination of what we consider to be more specialized coverages that include, but are not limited to, transactional liability and credit risk transfer related to residential mortgages.

Also reported as Other are the results of Cincinnati Global, our London-based global specialty underwriter for Lloyd's Syndicate 318, which we acquired on February 28, 2019. We expect it to contribute to future earnings and book value growth. We also believe it should provide opportunities to support business produced by our independent agencies in new geographies and lines of business.

Net written premiums for Cincinnati Global totaled $177 million in 2020, and were $140 million for the 10 months following its acquisition in 2019. Most of the 2020 premiums were for U.S. and international property exposures that include risk of loss from natural catastrophes, including approximately 68% classified as direct and facultative and 28% as binder, where binding authority has been granted to various coverholders, mostly in the U.S., that we believe have the ability to successfully underwrite and manage risks. The remainder, approximately 4%, was for other classes of business that include trade credit, terrorism and one additional class we began writing in 2020. The new class is specie coverage for high-value portable property. Cincinnati Global will add contingency insurance in 2021, which includes coverage for film and entertainment risks or event cancellation.
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Regulation
The business of insurance in the United States (U.S.) is primarily regulated by state law. All of our U.S. insurance company subsidiaries are domiciled in the state of Ohio except The Cincinnati Specialty Underwriters Insurance Company, which is domiciled in the state of Delaware. Each domestic insurance subsidiary is primarily governed by the insurance laws and regulations in its respective state of domicile. We also are subject to regulatory authorities of all states in which we write insurance. The state laws and regulations that have the most significant effect on our insurance operations and financial reporting are discussed below.
Insurance Holding Company Regulation – We are regulated as an insurance holding company system in the respective states of domicile of our lead standard market property casualty company subsidiary and its surplus lines insurance subsidiary. These regulations require that we annually furnish financial and other information about the governance and operations of the individual companies within the holding company system. Information about the risks posed by any noninsurance company subsidiaries must also be disclosed. All transactions within a holding company system affecting insurers must be fair and equitable. Notice to the state insurance commissioner is required prior to the consummation of transactions affecting the ownership or control of an insurer and prior to certain material transactions between an insurer and any person or entity in its holding company group. In addition, some of those transactions cannot be consummated without the commissioner’s prior approval.
Subsidiary Dividends – The Cincinnati Insurance Company is fully owned by Cincinnati Financial Corporation. The dividend-paying capacity of The Cincinnati Insurance Company and its fully owned subsidiaries is regulated by the laws of the applicable state of domicile. Under these laws, our domestic insurance subsidiaries must provide a 10-day advance informational notice to the insurance commissioner for the domiciliary state prior to payment of any dividend or distribution to its shareholders. Generally, the most our domestic insurance subsidiary can pay without prior regulatory approval is the greater of 10% of statutory capital and surplus or 100% of statutory net income for the prior calendar year.
The domestic insurance company subsidiaries must give 30 days of notice to, and obtain prior approval from, the state insurance commissioner before the payment of an extraordinary dividend as defined by the state’s insurance code. You can find information about the dividends paid by our insurance subsidiary during 2020 in Item 8, Note 9 of the Consolidated Financial Statements.
Insurance Operations – All of our domestic insurance subsidiaries are subject to licensing and supervision by departments of insurance in the states in which they do business. The nature and extent of such regulations vary, but generally are rooted in statutes that delegate regulatory, supervisory and administrative powers to state insurance departments. Such regulations, supervision and administration of the domestic insurance subsidiaries include: the standards of solvency that must be met and maintained; the licensing of insurers and their agents and brokers; the nature and limitations on investments; deposits of securities for the benefit of policyholders; regulation of standard market policy forms and premium rates; policy cancellations and nonrenewals; test audit programs; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; requirements regarding reserves for unearned premiums, losses and other matters; the nature of and limitations on dividends to policyholders and shareholders; the nature and extent of required participation in insurance guaranty funds; the involuntary assumption of hard-to-place or high-risk insurance business, primarily workers’ compensation insurance; and the collection, remittance and reporting of certain taxes and fees. Our primary insurance regulators in the U.S. have adopted the Model Audit Rule for annual statutory financial reporting. This regulation closely mirrors the Sarbanes-Oxley Act on matters such as auditor independence, corporate governance and internal controls over financial reporting. The regulation permits the audit committee of Cincinnati Financial Corporation’s board of directors to also serve as the audit committee of each of our insurance subsidiaries for purposes of this regulation.
Insurance Guaranty Associations – For certain obligations of insolvent insurance companies to policyholders and claimants, states assess each member insurer in an amount relative to the insurer’s proportionate share of business written by all member insurers in the state. While the amount of such assessments has not been material in recent years, we cannot predict the amount and timing of any future assessments or refunds on our insurance subsidiaries under these laws.
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Shared Market and Joint Underwriting Plans – Assigned risk plans, reinsurance facilities and joint underwriting associations are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. States can require participation based upon the amount of an insurance company’s voluntary market share, and underwriting results related to these pools could be adverse to our company.
Statutory Accounting – For public reporting, domestic insurance companies prepare financial statements in accordance with GAAP. However, certain data also must be calculated according to statutory accounting rules as defined in the NAIC’s Accounting Practices and Procedures Manual. While not a substitute for any GAAP measure of performance, statutory data frequently is used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies.
Insurance Reserves – State insurance laws require that property casualty and life insurers annually analyze the adequacy of reserves. Our appointed actuaries must submit an opinion that reserves are adequate for policy claims-paying obligations and related expenses.
Investment Regulation – Insurance company investments must comply with laws and regulations pertaining to the type, quality and concentration of investments. Such laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and other qualifications.
Risk-Based Capital Requirements – The NAIC’s risk-based capital (RBC) requirements for property casualty and life insurers serve as an early warning tool for the NAIC and state regulators to identify companies that may be undercapitalized and may merit further regulatory action. The NAIC has a standard formula for annually assessing RBC. The formula for calculating RBC for property casualty companies takes into account asset and credit risks but places more emphasis on underwriting factors for reserving and pricing. The formula for calculating RBC for life insurance companies takes into account factors relating to insurance, business, asset and interest-rate risks.
Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal legislation and administrative rules adopted can affect our business. Privacy laws, such as the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act and the Health Insurance Portability and Accounting Act (HIPAA) are the federal laws that most affect our day-to-day operations. These apply to us because we gather and use personal nonpublic information to underwrite insurance and process claims. We also are subject to other federal laws, such as the Terrorism Risk Insurance Act (TRIA), anti-money laundering statute (AML), the Nonadmitted and Reinsurance Reform Act (NRRA), the U.S. Foreign Corrupt Practices Act (FCPA), and the rules and regulations of the Office of Foreign Assets Control (OFAC).

Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) created the Federal Insurance Office to monitor the insurance industry and gather information to identify issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry that affects the United States’ financial system and to recommend to the Financial Stability Oversight Council that it designate an insurer as a systemically significant entity requiring additional supervision by the Federal Reserve Board. We do not expect Dodd-Frank to result in federal oversight of our operations as a systemically significant entity.
 
We do not expect to have any material effects on our expenditures, earnings or competitive position as a result of compliance with any federal, state or local provisions enacted or adopted relating to the protection of the environment. We currently do not have any material estimated capital expenditures for environmental control facilities.
 
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We operate in limited foreign jurisdictions. Our foreign insurance subsidiary Cincinnati Global Underwriting Ltd., based in the United Kingdom (U.K.), holds a group of companies led by our managing agency, Cincinnati Global Underwriting Agency Ltd. (CGUAL), of Lloyd’s Syndicate 318, which is regulated by The Prudential Regulation Authority (PRA) and The Financial Conduct Authority (FCA). The PRA’s primary objective with respect to insurers is to promote the safety and soundness of insurers for the protection of policyholders, while the FCA has three operational objectives: (i) to secure an appropriate degree of protection for consumers; (ii) to protect and enhance the integrity of the U.K. financial system; and (iii) to promote effective competition in the interests of consumers in the financial services markets. The PRA/FCA’s Senior Managers and Certification Regime provides regulatory frameworks for standards of fitness and propriety, conduct and accountability for individuals in positions of responsibility at insurers. The PRA and FCA have also delegated certain additional regulatory responsibilities to the Council of Lloyd’s. By virtue of Lloyd’s international licenses, we can write business in various countries throughout the world. In each such country, we are subject to the laws and insurance regulations of that jurisdiction.

Our operations in the U.K. are further subject to regulation by the European Union (EU). Generally, EU requirements are adopted by the EU and then implemented by enabling legislation in the member countries. Significant areas of oversight and influence from the EU include capital, solvency and risk management requirements (Solvency II), competition law and antitrust regulation, intermediary and distribution regulation, gender discrimination and data protection and privacy (General Data Protection Regulation). The applicability of EU regulation to our U.K. business is likely to change in ways yet to be determined as a result of the U.K.’s exit from the EU.
Cincinnati Financial Corporation - 2020 10-K - Page 32


Enterprise Risk Management
We manage enterprise risk through formal risk management programs overseen by an executive officer of the company. Our ERM framework includes an enterprise risk management committee, which is responsible for overseeing risk activities and is comprised of senior executive-level risk owners from across the enterprise. The risk committee's activities are supported by a team of representatives from business areas that focus on identifying, evaluating and developing risk plans for emerging risks. A comprehensive report is provided quarterly to our chairman, president and chief executive officer and also to our board of directors and our senior executive team, as appropriate, on the status of risk metrics relative to identified tolerances and limits, risk assessments and risk plans. The use of operational audits, strategic plans and departmental business plans, as well as our culture of open communications and fundamental respect for our Code of Conduct, continue to help us manage risks on an ongoing basis.

We understand that a cybersecurity incident is just one example of an event that could affect our future performance. We work to keep our systems and data secure while continuing to increase our understanding of cybersecurity risk through risk management efforts and testing by third-party experts of our cybersecurity program structure and capabilities. Those efforts include blocking attempted cyber intrusions, defending against denial of service attacks, performing frequent vulnerability assessments and maintaining procedures to ensure timely notification of critical cybersecurity incidents and related disclosure controls. Cybersecurity matters are an important part of reporting to our executive management team, risk committee and the board of directors. Effects of cyberattacks can happen to any corporation and they can be significant, including additional costs for remediation, litigation and reputational damage. During 2020, we experienced no cybersecurity incidents having a material effect on our operations or financial performance.

Our risk management programs include a formalized risk appetite element and a risk identification and quantification process. The overall enterprise objective is to appropriately balance risk and reward to achieve an appropriate return on risk capital. Our key risks are discussed in Item 1A, Risk Factors, including risks related to natural catastrophes, investments and operations.

We continue to study emerging risks, including climate change risk and its potential financial effects on our results of operations and on those we insure. These effects include deterioration in the credit quality of our municipal or corporate bond portfolios and increased losses without sufficient corresponding increases in premiums. As with any risk, we seek to identify the extent of the risk exposure and possible actions to mitigate potential negative effects of risk at an enterprise level.

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ITEM 1A.   Risk Factors
Our business involves various risks and uncertainties that may affect achievement of our business objectives. Many of the risks could have ramifications across our organization. For example, while risks related to setting insurance rates and establishing and adjusting loss reserves are insurance activities, actual results differing from our assumptions, judgments or estimates in these areas could have an impact on our investment activities, growth and overall results.
 
The following discussion should be viewed as a starting point for understanding the significant risks we face. It is not a definitive summary of their potential impacts or of our strategies to manage and control the risks. Please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of those strategies.
 
If any risks or uncertainties discussed here develop into actual events, they could have a material adverse effect on our business, financial condition, results of operations or cash flows. In that case, the market price of our common stock could decline materially. The failure of our risk management strategies could have a material adverse impact on our consolidated financial condition, results of operations or cash flows.
 
Readers should carefully consider this information together with the other information we have provided in this report and in other reports and materials we file periodically with the Securities and Exchange Commission as well as news releases and other information we disseminate publicly.

Risks related to insurance operations

We rely primarily on independent insurance agents to distribute our products.
We market our main products, insurance policies for businesses and individuals, through independent, nonexclusive insurance agents. These agents are not obligated to promote our products and can and do sell our competitors’ products. We must offer insurance products that meet the needs of these agents and their clients. We need to maintain good relationships with the agents who market our products. If we do not, these agents may market our competitors’ products instead of ours, which may lead to us having a less desirable mix of business and could affect our results of operations.
 
In addition to our marketing of insurance policies for businesses and individuals, Cincinnati Re reinsures policies written by other insurance companies. This business is marketed through reinsurance intermediaries and is generally not offered by the typical independent agents who market our insurance policies.

Certain events or conditions could diminish our agents’ desire to produce business for us and the competitive advantage that our independent agents enjoy, including:
Downgrade of the financial strength ratings of our insurance subsidiaries. We believe our strong insurer financial strength ratings, in particular, the A+ (Superior) ratings from A.M. Best for our standard market property casualty insurance group and each subsidiary in that group, are an important competitive advantage. See Item 1, Our Business and Our Strategy, Financial Strength, for additional discussion of our financial strength ratings.
Concerns that doing business with us is difficult or not profitable, perceptions that our level of service is no longer a distinguishing characteristic in the marketplace, perceptions that our products do not meet the needs of our agents’ clients or perceptions that our business practices are not compatible with agents’ business models.
Mergers and acquisitions could result in a concentration of a significant amount of premium in one agency.
Delays in the development, implementation, performance and benefits of technology systems and enhancements or independent agent perceptions that our technology solutions do not match their needs.

A reduction in the number of independent agencies marketing our products, the failure of agencies to successfully market our products or pay amounts due to us, changes in the strategy or operations of agencies or the choice of agencies to reduce their writings of our products could affect our results of operations if we were unable to replace them with agencies that produce adequate and profitable premiums.
 
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Further, policyholders may choose a competitor’s product rather than our own because of real or perceived differences in price, terms and conditions, coverage or service. If the quality of the independent agencies with which we do business were to decline, that also might cause policyholders to purchase their insurance through different agencies or channels. Consumers, especially in the personal insurance industry segment, may increasingly choose to purchase insurance from distribution channels other than independent insurance agents, such as direct marketers. Increased advertising by insurers, especially direct marketers, could cause consumers to shift their buying habits, bypassing independent agents altogether. Innovation, new or changing technologies and/or buying trends or consumer preferences could reduce or eliminate the need or demand for products we sell.
 
Our credit ratings or financial strength ratings of our insurance subsidiaries could be downgraded.
A downgrade in one or more of our company’s credit or debt ratings could adversely impact our borrowing costs or limit our access to capital. Financial strength ratings reflect a rating agency’s opinion of our insurance subsidiaries’ financial strength, operating performance, strategic position and ability to meet obligations to policyholders. Our ratings are subject to periodic review and there is no assurance that our ratings will not be changed. Rating agencies could change or expand their requirements or could find that our insurance subsidiaries no longer meet the criteria established for current ratings. If our property casualty or life insurance subsidiary insurer financial strength ratings were to be downgraded, our agents might find it more difficult to market our products or might choose to emphasize the products of other carriers.
 
We could experience an unusually high level of losses due to catastrophic, terrorism or epidemic events or risk concentrations.
In the normal course of our business, both in our insurance and reinsurance operations, we provide coverage against perils for which estimates of losses are highly uncertain, in particular catastrophic and terrorism events. Catastrophes can be man-made or caused by natural perils. Man-made catastrophes to which we may be exposed include, but are not limited to, industrial accidents, terrorist attacks, social unrest and riot. Natural peril catastrophe events to which we may be exposed include, but are not limited to, hurricanes, tornadoes, windstorms, earthquakes, landslides, hailstorms, flooding, severe winter weather and wildfires. Due to the nature of these events, we are unable to predict precisely the frequency or potential cost of catastrophe occurrences. Various scientists and other experts believe that changing climate conditions have added to the unpredictability, frequency and severity of such natural disasters in certain parts of the world and have created additional uncertainty as to future trends and exposures. We cannot predict the impact that changing climate conditions may have on our results of operations nor can we predict how any legal, regulatory or social responses to concerns about climate change may impact our business. Additionally, man-made events, such as hydraulic fracturing, could cause damage from earth movement or create environmental and/or health hazards.
 
The extent of losses from a catastrophe is a function of both the total amount of insured and reinsured exposure in the area affected by the event and the severity of the event. Our ability to appropriately manage catastrophe risk depends partially on catastrophe models, which may be affected by inaccurate or incomplete data, the uncertainty of the frequency and severity of future events and the uncertain impact of climate change. Additionally, these models are recalibrated and changed over time, with more data availability and changing opinions regarding the effect of current or emerging loss patterns and conditions.

According to these models, probable maximum loss estimates from a single hurricane event that combine the effects of property casualty insurance written on a direct basis by The Cincinnati Insurance Companies, the Cincinnati Re reinsurance portfolio and risks insured by Cincinnati Global include the following amounts, net of amounts recoverable through reinsurance ceded and also income taxes, and including the effects of estimated reinstatement premiums: $326 million for a once-in-a-100-year event and $459 million for a once-in-a-250-year event. Please see Item 7, Liquidity and Capital Resources, 2021 Reinsurance Programs, for a discussion of modeled losses considered in evaluating our risk mitigation strategy, which includes our ceded reinsurance program.
 
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The geographic regions in which we market insurance and reinsurance are exposed to numerous natural catastrophes, such as:
Hurricanes in the gulf, eastern, southeastern and northeastern coastal regions.
Earthquakes in many regions, most particularly in the New Madrid fault zone, California, the Northwest and Southwest.
Tornadoes, wind and hail in the Midwest, South, Southeast, Southwest and the mid-Atlantic.
Wildfires.
On a worldwide basis, in the event of a severe catastrophic event or terrorist attack we may be exposed to material losses through our Cincinnati Re and Cincinnati Global operations.

The occurrence of terrorist attacks in the geographic areas we serve could result in substantially higher claims under our insurance policies than we have anticipated. While our insurance policies provide coverage for terrorism risk in all areas we serve, we have identified our major terrorism exposure geographically as risks in the Tier 1 cities of Chicago, Dallas, New York, Houston, Los Angeles and Washington D.C. We have a greater amount of business in less hazardous Tier 2 cities such as Atlanta, Cincinnati, Cleveland, Denver, Minneapolis, Phoenix-Mesa, Pittsburgh, St. Louis and Tampa-St. Petersburg. We have exposure to small co-op utilities, water utilities, wholesale fuel distributors, small shopping malls and small colleges throughout our 45 active states and, because of the number of associates located there, our Fairfield, Ohio, headquarters. Additionally, our life insurance subsidiary could be adversely affected in the event of a terrorist event or an epidemic, particularly if the epidemic were to affect a broad range of the population, or affects the overall economy. Our associate health plan is self-funded and could similarly be affected.
 
Our results of operations would be adversely affected if the level of losses we experience over a period of time were to exceed our actuarially determined expectations. In addition, our financial condition may be adversely affected if we were required to sell securities prior to maturity or at unfavorable prices to pay an unusually high level of loss and loss expenses. Securities pricing might be even less favorable if a number of insurance or other companies and other investors needed to sell securities during a short period of time because of unusually high losses from catastrophic events.
 
Our geographic concentration ties our performance to business, economic, environmental and regulatory conditions in certain states. We market our standard market property casualty insurance products in 45 states, but our business is concentrated in the Midwest and Southeast. We also have exposure in states where we do not actively market insurance when clients of our independent agencies have businesses or properties in multiple states.
 
The Cincinnati Insurance Company continues to expand its Cincinnati Re reinsurance assumed operations and has staffed it with seasoned underwriting and analytical talent who strive to assume risks that we understand well, both quantitatively and qualitatively. Business written includes treaties that provide coverage for property catastrophe and terrorism events on a worldwide basis. Based on treaties in effect at January 1, 2021, the largest loss exposure to us for Cincinnati Re is from natural catastrophe events. That exposure includes probable maximum loss estimates, on a marginal basis, of the following amounts: $116 million for a once-in-a-100-year event and $118 million for a once-in-a-250-year event. Those effects represent a single hurricane event and include the effects of income taxes, estimated reinstatement premiums and applicable reinsurance ceded, including any retrocessions for reinsurance assumed, and estimated reinstatement premiums. They are based on probable maximum loss estimates from the Applied Insurance Research Touchstone® version 7.0 catastrophe model. The marginal basis reflects diversification effects of the Cincinnati Re reinsurance portfolio and property casualty insurance written on a direct basis by The Cincinnati Insurance Companies. Ignoring diversification effects provided by those two components, on a standalone basis, probable maximum loss estimates for Cincinnati Re include the following amounts: $167 million for a once-in-a-100-year event and $193 million for a once-in-a-250-year event. If there is a high frequency of large property catastrophe or terrorism events, or a single extreme event, during the coverage period of these treaties, our financial position and results of operations could be materially affected.

We are also expanding Cincinnati Global, our global specialty underwriter with premiums primarily for U.S. and international property exposures, given its seasoned underwriting talent. At January 1, 2021, the largest loss exposure to us for Cincinnati Global is from natural catastrophe events. That exposure includes probable maximum loss estimates of the following amounts: $48 million for a once-in-a-100-year event and $77 million for a once-in-a-250-year event. Those effects are on a standalone basis and represent a single hurricane event and include the effects of income taxes, applicable reinsurance ceded and estimated reinstatement premiums. They are
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based on probable maximum loss estimates from the Applied Insurance Research Touchstone version 7.0 catastrophe model. If there is a high frequency of large property catastrophe or terrorism events, or a single extreme event, during the coverage period of its policies, our financial position and results of operations could be materially affected.

Additionally, the companies we invest in might be severely affected by a severe catastrophic event, terrorist attack, or epidemic event which could affect our financial condition and results of operations. Our reinsurers might experience significant losses, potentially jeopardizing their ability to pay losses we cede to them. It could also reduce the availability of reinsurance. If we cannot obtain adequate coverage at a reasonable cost, it could constrain where we can write business or reduce the amount of business we can write in certain areas. We also may be exposed to state guaranty fund assessments if other carriers in a state cannot meet their obligations to policyholders. A catastrophe or epidemic event also could affect our operations by damaging our headquarters facility, injuring associates and visitors at our Fairfield, Ohio, headquarters or disrupting our associates’ ability to perform their assigned tasks.
 
The outbreak of COVID-19 could result in an unusually high level of losses.
In March 2020, the outbreak of COVID-19, also known as the novel coronavirus SARS-CoV-2, was recognized as a pandemic by the World Health Organization. The outbreak has become increasingly widespread in the United States, including in the markets in which we operate. Like many companies in the property casualty insurance industry, our property casualty subsidiaries were named as defendants in lawsuits seeking insurance coverage under commercial property insurance policies issued by the company for alleged losses resulting from the shutdown or suspension of their businesses due to the COVID-19 pandemic. Risks to our business include legislation or court decisions that extend business interruption insurance in commercial property coverage forms to cover claims for pure economic loss related to the COVID-19 pandemic. Legislative initiatives and pending litigation are ongoing in numerous jurisdictions, and we cannot provide assurance that we will not be impacted by adverse legislation or adverse judicial rulings in certain of these jurisdictions. These actions seek to extend coverage beyond the terms and conditions we intended for those policies, including policies that do not contain specific virus exclusions. Therefore we could be forced to pay claims when no coverage was contemplated and for which no premium was collected. If these actions are successful, the aggregate amount of these claims could have a material, adverse impact on our business, financial condition, reputation, results of operations and cash flows.

Our net losses and loss adjustment expenses are estimates and actual net losses could be higher.
Our estimates for COVID-19 losses and loss adjustment expenses represent our best estimates as of December 31, 2020, based upon information currently available. These estimates are based on reported claims, policy level reviews and recent judicial rulings. However, assumptions about coverage, liability and reinsurance continue to be subject to on-going judicial review and may be subject to further government action. While we believe our net reserves for losses and loss adjustment expenses for COVID-19 as of December 31, 2020, are adequate based on information available at this time, we continue to closely monitor reported claims, government actions, judicial decisions and changes in the levels of worldwide social disruption and economic activity arising from the pandemic and will adjust our estimates of gross and net losses as new information becomes available. Factors that affect our estimates of losses and loss adjustment expenses or our ability to reasonably estimate such losses include the continuing duration of the pandemic and governmental actions to limit the spread of the virus that may produce additional economic losses; the number of policyholders that will ultimately submit claims or file lawsuits; the lack of submitted proofs of loss for allegedly covered claims; judicial rulings in similar litigation involving other companies in the insurance industry; difference in state law and developing case law in the relatively few decisions rendered to date; litigation trends, including varying legal theories advanced by policyholders; whether and to what degree any class of policyholders may be certified; and the inherent unpredictability of litigation. Such adjustments to our reserves for COVID-19 losses and loss adjustment expenses may be material to our results of operations, financial condition and cash flows.

A weaker economy could result in reduced insurance premium revenue.
The outbreak of COVID-19 could have adverse impacts on economic activity that affect demand for insurance or cause substantial disruption to our distribution channel of independent agents, due to self-isolation, travel limitations, business restrictions, and otherwise. During the pandemic, many areas within the United States have imposed mandatory closures for businesses not deemed to be essential. It is currently unclear if such mandatory closures will again be imposed or for how long such closures will last. Though most of our employees are able to work remotely, these closures have affected agents, through which we sell our products and services, or their clients, which could result in significant declines in premium revenues. In an effort to support insurance consumers
Cincinnati Financial Corporation - 2020 10-K - Page 37


during this pandemic, most states where we market our products have 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. Such actions may result in delayed premium receipts, disrupting cash flows and increasing credit risk from policyholders unable to make timely premium payments. Cash flows and gross premium receipts may also be affected by mid-term adjustments to exposures on which premium calculations are based to reflect the economic impact of the COVID-19 crisis on insureds’ business operations. The amount or duration of the effects could adversely impact our business, financial condition, results of operations or cash flows. Such adverse impacts may be material.

Our ability to properly underwrite and price risks and increased competition could adversely affect our results.
Our financial condition, results of operations and cash flows depend on our ability to underwrite and set rates accurately for a full spectrum of risks. We establish our pricing based on assumptions about the level of losses that may occur within classes of business, geographic regions and other criteria.
 
To properly price our products, we must collect, properly analyze and use data to make decisions and take appropriate action; the data must be sufficient, reliable and accessible; we need to develop appropriate rating methodologies and formulae; and we may need to identify and respond to trends quickly. We may overestimate or underestimate loss cost trends or these trends may unexpectedly change, leading to losing business by pricing risks above our competitors or charging rates too low to maintain profitability. Inflation trends, especially outside of historical norms, may make it more difficult to determine adequate pricing. If rates are not accurate, we may not generate enough premiums to offset losses and expenses, or we may not be competitive in the marketplace.
 
Our ability to set appropriate rates could be hampered if states where we write business refuse to allow rate increases that we believe are necessary to cover the risks insured. A state could also hamper our ability to set appropriate rates if it no longer allowed us to use factors that we believe are predictive of loss, such as credit-based factors. Multiple states require us to purchase reinsurance from a mandatory reinsurance fund. Such reinsurance funds can create a credit risk for insurers if not adequately funded by the state and, in some cases, the existence of a reinsurance fund could affect the prices charged for our policies. The effect of these and similar arrangements could reduce our profitability in any given period or limit our ability to grow our business.
 
The insurance industry is cyclical and intensely competitive. From time to time, the insurance industry goes through prolonged periods of intense competition during which it is more difficult to attract new business, retain existing business and maintain profitability. Competition in our insurance business is based on many factors, including:
Competitiveness of premiums charged
Relationships among carriers, agents, brokers and policyholders
Underwriting and pricing methodologies that allow insurers to identify and flexibly price risks
Compensation provided to agents
Underwriting discipline
Terms and conditions of insurance coverage
Speed with which products are brought to market
Product and marketing innovations, including advertising
Technological competence and innovation
Ability to control expenses
Adequacy of financial strength ratings by independent rating agencies such as A.M. Best
Quality of services and tools provided to agents and policyholders
Claims satisfaction and reputation

Cincinnati Financial Corporation - 2020 10-K - Page 38


We compete with major U.S., Bermudian, European, and other international insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing and management resources than we do. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. We also compete with new companies that continue to enter the insurance and reinsurance markets. In addition, capital market participants have created alternative products that are intended to compete with reinsurance products that we sell in Cincinnati Re. Increased competition could result in fewer submissions, lower premium rates, and less favorable policy terms and conditions, which could reduce our underwriting margins and have a material adverse effect on our results of operations and financial condition.

If our pricing was incorrect or we were unable to compete effectively because of one or more of these factors, our premium writings could decline and our results of operations and financial condition could be materially adversely affected. Large competitors could intentionally disrupt the market by targeting certain lines or underpricing the market.
 
Please see the discussion of our Commercial Lines, Personal Lines, Excess and Surplus Lines and Life Insurance Segments in Item 1, Our Segments, for a discussion of our competitive position in the insurance marketplace.
 
Our pricing and capital models could be flawed.  
We use various actuarial pricing methods, predictive pricing and underwriting models, stochastic models and/or forecasting techniques to help us understand our business, analyze risk and estimate future trends. The output of these techniques and models is used to assist us in making underwriting, pricing, reinsurance, reserving and capital decisions and helps us set our strategic direction. These models contain numerous assumptions, including the assumption that the data used is sufficient and accurate. They are also subject to uncertainties and limitations inherent in any statistical analysis. Actual results may be materially different from modeled output, resulting in pricing our products incorrectly, overestimating or underestimating reserves, or inaccurately forecasting the impact of modeled events on our results. This could materially adversely impact the results of our operations.
 
Our loss reserves, our largest liability, are based on estimates and could be inadequate to cover our actual losses.
Our consolidated financial statements are prepared using GAAP. These principles require us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates. For a discussion of the significant accounting policies we use to prepare our financial statements, the material implications of uncertainties associated with the methods, assumptions and estimates underlying our critical accounting policies and the process used to determine our loss reserves, please refer to Item 8, Note 1 of the Consolidated Financial Statements, and Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves and Life Insurance Policy Reserves.
 
Our most critical accounting estimate is loss reserves. Loss reserves are the amounts we expect to pay for covered claims and expenses we incur to settle those claims. The loss reserves we establish in our financial statements represent an estimate of amounts needed to pay and administer claims arising from insured events that have already occurred, including events that have not yet been reported to us. Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability. Inflationary scenarios, especially scenarios outside of historical norms or regulatory changes that affect the assumptions underlying our critical accounting estimates, may make it more difficult to estimate loss reserves. Accordingly, our loss reserves for past periods could prove to be inadequate to cover our actual losses and related expenses. Any changes in these estimates are reflected in our results of operations during the period in which the changes are made. An increase in our loss reserves would decrease earnings, while a decrease in our loss reserves would increase earnings.
 
Unforeseen losses, the type and magnitude of which we cannot predict, may emerge. These additional losses could arise from changes in the legal environment, laws and regulations, climate change, catastrophic events, increases in loss severity or frequency, environmental claims, mass torts or other causes such as social inflation. Such future losses could be substantial. Inflationary scenarios may cause the cost of claims, especially medical claims, to rise, impacting reserve adequacy and our results of operations.

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In addition to the risks stated above, Cincinnati Re reserves are subject to uncertainty because a reinsurer relies on the original underwriting decisions and claims reserving practices of ceding companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition, there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of the loss. Similar risks exist for Cincinnati Global due to reliance on coverholders in underwriting parts of its business.

The anticipated benefits may not be realized for our acquisition of Cincinnati Global.
Cincinnati Global, our London-based global specialty underwriter for Lloyd's Syndicate 318, was acquired on February 28, 2019. We can provide no assurance that the anticipated benefits of the transaction will be fully realized in the time frame anticipated or at all, or that the costs or difficulties related to the integration of its operations will not be greater than expected. The success of the transaction will depend, in part, on our ability to realize the anticipated business opportunities and growth prospects from acquiring Cincinnati Global. We may never realize these business opportunities and growth prospects, and our management might have its attention diverted while trying to integrate operations.

Cincinnati Global’s international operations subjects us to additional regulation and could expose us to additional investment, political and economic risks.
We have international operations that could expose us to a number of additional risks. These risks include restrictions such as price controls, capital controls, currency exchange limits, ownership limits and other restrictive or anti-competitive governmental actions or requirements, which could have an adverse effect on our business and reputation. Our business activities outside the United States, including the United Kingdom (U.K.), could also be subject to political and economic risks, including foreign currency and credit risk. Additionally, Cincinnati Global’s operations will expand the products offered by us and could expose us to additional regulation or other risks.
Additionally, business activities outside the United States will subject us to additional domestic and foreign laws and regulations, including the Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws in other countries that prohibit the making of improper payments to foreign officials. In addition, insurers in the U.K. (including managing agents and members of Lloyd’s of London) are subject to Solvency II and the U.K. regulatory regime, which itself includes rules promulgated by Lloyd's. Although we have policies and controls in place that are designed to ensure compliance with these laws and regulatory requirements, if those controls are ineffective and an employee or intermediary fails to comply with applicable laws and regulations, we could suffer civil and criminal penalties and our business and reputation could be adversely affected. Some countries have laws and regulations that lack clarity and, even with local expertise and effective controls, it can be difficult to determine the exact requirements of, and potential liability under, the local laws. Failure to comply with local laws in a particular market may result in substantial liability and could have a significant and negative effect not only on our business in that market but also on our reputation generally.

Business activities at Cincinnati Global are subject to Lloyd's approval of a business plan each year. There is risk that plans will not be approved or will be limited. As a Lloyd’s managing agent and syndicate, Cincinnati Global is exposed to various risks and the uncertainties associated, including its obligation to maintain funds at Lloyd’s to support its underwriting activities and periodic assessment of its capital, governance and other aspects of its business.

Developments relating to the United Kingdom’s leaving the European Union could adversely affect Cincinnati Global’s operations.
The terms of the U.K.’s withdrawal from the European Union (Brexit) and the relationship between the U.K. and the European Union going forward can affect economic conditions, including the terms of trade between them. The ultimate impact of Brexit is uncertain and will depend on any agreements that the U.K. makes to retain access to European Union markets. Brexit could also lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which European Union laws to replace or replicate. These or other adverse consequences from Brexit could adversely affect the operations and business opportunities of Cincinnati Global.

With a view to mitigating the potential effects of Brexit on business underwritten through Lloyd’s, it has set up an insurance company subsidiary in Belgium, with the intention of underwriting European Economic Area insurance business via that subsidiary. It is uncertain how effective Lloyd's proposed Brexit contingency plan will be.

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Our ability to obtain or collect on our reinsurance protection could affect our business, financial condition, results of operations or cash flows.
We buy property casualty and life reinsurance coverage to mitigate the liquidity risk and earnings volatility risk of an unexpected rise in claims severity or frequency from catastrophic events or a single large loss. The availability, amount and cost of reinsurance depend on market conditions and may vary significantly. If we were unable to obtain reinsurance on acceptable terms and in appropriate amounts, our business and financial condition could be adversely affected.
 
In addition, we are subject to credit risk with respect to our reinsurers. Although we purchase reinsurance to manage our risks and exposures to losses, this reinsurance does not discharge our direct obligations under the policies we write. We would remain liable to our policyholders even if we were unable to recover what we believe we are entitled to receive under our reinsurance contracts. Reinsurers might refuse or fail to pay losses that we cede to them, or they might delay payment. For long-tail claims, the creditworthiness of our reinsurers may change before we can recover amounts to which we are entitled. A reinsurer’s insolvency, inability or unwillingness to make payments under the terms of its reinsurance agreement with our insurance subsidiaries could have a material adverse effect on our financial position, results of operations or cash flows.
 
Please see Item 7, Liquidity and Capital Resources, 2021 Reinsurance Ceded Programs, for a discussion of selected reinsurance transactions.
 
Risks related to investments or other financial matters

Financial disruption or a prolonged economic downturn could materially and adversely affect our investment performance.
The outbreak of COVID-19 has contributed to recent significant disruption and volatility for financial markets and decreased economic activity. Many companies have experienced uncertainty and reduced liquidity. These market conditions could cause our investment income or the value of securities we own to decrease. In the event that these conditions recur or result in a prolonged economic downturn, they could adversely impact our financial condition, results of operations or cash flows. Such adverse impacts may be material.

Our ability to achieve our performance objectives could be affected by changes in the financial, credit and capital markets or the general economy.
We invest premiums received from policyholders and other available cash to generate investment income and capital appreciation, while also maintaining sufficient liquidity to pay covered claims and operating expenses, service our debt obligations and pay dividends. The value of our invested assets is an important component of shareholders’ equity, also known as book value. Changes in the valuation of invested assets can significantly affect changes in book value per share, a key performance objective as discussed in Item 7, Executive Summary of Management’s Discussion and Analysis.
 
For fixed-maturity investments such as bonds, which represented 58.2% of the fair value of our investment portfolio at the end of 2020, the inverse relationship between interest rates and bond prices leads to falling bond values during periods of increasing interest rates. A significant increase in the general level of interest rates could have an adverse effect on our shareholders’ equity.
 
Investment income is an important component of our revenues and net income. The ability to increase investment income and generate longer-term growth in book value is affected by factors beyond our control, such as: inflation, economic growth, interest rates, world political conditions, changes in laws and regulations, epidemic events, terrorism attacks or threats, adverse events affecting other companies in our industry or the industries in which we invest, market events leading to credit constriction, and other widespread unpredictable events. These events may adversely affect the economy generally and could cause our investment income or the value of securities we own to decrease. A significant decline in our investment income could have an adverse effect on our net income, and thereby on our shareholders’ equity and our statutory capital and surplus. For a more detailed discussion of risks associated with our investments, please refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk.
 
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We have issued life contracts with guaranteed minimum returns, referred to as bank-owned life insurance contracts (BOLIs). BOLI investment assets must meet certain criteria established by the regulatory authorities in the jurisdiction for which the group contract holder is subject. Therefore, sales of investments may be mandated to maintain compliance with these regulations, possibly requiring gains or losses to be recorded. We could experience losses if the assets in the accounts were less than liabilities at the time of maturity or termination.
 
Our investment performance also could suffer because of the types of investments, industry groups and/or individual securities in which we choose to invest. Market value changes related to these choices could cause a material change in our financial condition or results of operations.
 
At year-end 2020, common stock holdings made up 40.3% of our investment portfolio. Adverse news or events affecting the global or U.S. economy or the equity markets could affect our net income, book value and overall results, as well as our ability to pay our common stock dividend. See Item 7, Investments Results, and Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for a discussion of our investment activities.
 
Deterioration in the banking sector or in banks with which we have relationships could affect our results of operations. Our ability to maintain or obtain short-term lines of credit could be affected if the banks from which we obtain these lines are acquired, fail or are otherwise negatively affected. We may lose premium revenue if a bank that owns appointed agencies were to change its strategies. We could experience increased losses in our director and officer liability line of business if claims were made against insured financial institutions.
 
A deterioration of credit and market conditions could also impair our ability to access credit markets and could affect existing or future lending arrangements.
 
Our overall results could be affected if a significant portion of our commercial lines policyholders, including those purchasing surety bonds, are adversely affected by marked or prolonged economic downturns and events such as a downturn in construction and related sectors, tightening credit markets and higher fuel costs. Such events could make it more difficult for policyholders to finance new projects, complete projects or expand their businesses, leading to lower premiums from reduced payrolls and sales and lower purchases of equipment and vehicles. These events could also cause claims, including surety claims, to increase due to a policyholder’s inability to secure necessary financing to complete projects or to collect on underlying lines of credit in the claims process. Such economic downturns and events could have a greater impact in the construction sector where we have a concentration of risks and in geographic areas that are hardest hit by economic downturns.
 
Deteriorating economic conditions could also increase the degree of credit risk associated with amounts due from independent agents who collect premiums for payment to us and could hamper our ability to recover amounts due from reinsurers.

Our status as an insurance holding company with no direct operations could affect our ability to pay dividends in the future.
Cincinnati Financial Corporation is a holding company that transacts substantially all of its business through its subsidiaries. Our primary assets are the stock in our operating subsidiaries and our investments. Consequently, our cash flow to pay cash dividends and interest on our long-term debt depends on dividends we receive from our operating subsidiaries and income earned on investments held at the parent-company level.
 
Dividends received from our lead insurance subsidiary are restricted by the insurance laws of Ohio, its domiciliary state. These laws establish minimum solvency and liquidity thresholds and limits. In 2021, the maximum dividend that may be paid without prior regulatory approval is limited to the greater of 10% of statutory capital and surplus or 100% of statutory net income for the prior calendar year, up to the amount of statutory unassigned capital and surplus as of the end of the prior calendar year. Dividends exceeding these limitations may be paid only with prior approval of the Ohio Department of Insurance. We might not be able to receive dividends from our insurance subsidiaries, or we might not receive dividends in the amounts necessary to meet our debt obligations or to pay dividends on our common stock without liquidating securities. This could affect our financial position.
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Please see Item 1, Regulation, and Item 8, Note 9 of the Consolidated Financial Statements, for a discussion of insurance holding company dividend regulations.

General risk factors

Our business depends on the uninterrupted operation of our facilities, systems and business functions.
Our business depends on our associates’ ability to perform necessary business functions, such as processing new and renewal policies and handling claims. We increasingly rely on technology and systems to accomplish these business functions in an efficient and uninterrupted fashion. Our inability to access our headquarters facilities for certain critical functions or a failure of technology, telecommunications or other systems or the loss or failure of services provided by key vendors, could significantly impair our ability to perform such functions on a timely basis or affect the accuracy of transactions. If sustained or repeated, such a business interruption or system failure could result in a deterioration of our ability to write and process new and renewal business, serve our agents and policyholders, pay claims in a timely manner, collect receivables or perform other necessary business functions. If our disaster recovery and business continuity plans did not sufficiently consider, address or reverse the circumstances of an interruption or failure, this could result in a materially adverse effect on our operating results and financial condition. This risk is exacerbated because approximately 64% of our associates typically work at our Fairfield, Ohio, headquarters. As stay-at-home actions were enacted in 2020, we promptly and effectively transitioned most of our headquarters associates to working from home.
 
Our ability to successfully execute business functions also depends on hiring and retaining qualified associates. Competition for high-quality executives and other key associates occurs within the insurance industry and from other industries. We also must effectively develop and manage associates, including providing training and resources. Such tools and information can allow them to effectively perform critical business functions and adapt to changing business needs. If we were unable to attract and retain certain associates, or if we fail to provide adequate training or resources, we could limit the success of executing our strategic plans and vital business functions.
 
The effects of changes in industry practices, laws and regulations on our business are uncertain.
As industry practices and legal, judicial, legislative, regulatory, political, social and other environmental conditions change, unexpected and unintended issues related to insurance pricing, claims and coverage may emerge. These issues may adversely affect our business by impeding our ability to obtain adequate rates for covered risks or otherwise extending coverage beyond our underwriting intent, by increasing the number or size of claims, by varying assumptions underlying our critical accounting estimates or by increasing duties owed to policyholders beyond contractual obligations. In some instances, unforeseeable emerging and latent claim and coverage issues and court decisions or legislative changes may not become apparent until sometime after we have issued the insurance policies that could be affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued and our pricing and reserve estimates may not accurately reflect its effect.
 
We are required to adopt new or revised accounting standards issued by recognized authoritative organizations, including the Financial Accounting Standards Board (FASB) and the SEC. Future changes required to be adopted could change the current accounting treatment that we apply and could result in material adverse effects on our results of operations, financial position or cash flows.
 
Our investment income benefits from tax rate preferences for municipal bond interest and dividend income from equity securities. Market valuations for these securities also benefit from the tax-preference aspect of current tax laws, affecting the value of our investment portfolio and also shareholders’ equity. Future changes in tax laws could result in material adverse effects on our results of operations and financial condition.
 
The NAIC, state insurance regulators and state legislators continually re-examine existing laws and regulations governing insurance companies and insurance holding companies, specifically focusing on modifications to statutory accounting principles, interpretations of existing laws, regulations relating to product forms and pricing methodologies and the development of new laws and regulations that affect a variety of financial and nonfinancial components of our business. Any proposed or future legislation, regulation or NAIC initiatives, if adopted, may be more restrictive on our ability to conduct business than current regulatory requirements or may result in
Cincinnati Financial Corporation - 2020 10-K - Page 43


higher costs. The loss or significant restriction on the use of a particular variable, such as credit, in pricing and underwriting our products could lead to future unprofitability and increased costs.
 
Federal laws and regulations and the influence of international laws and regulations, including those that may be enacted in the wake of the financial and credit crises, may have adverse effects on our business, potentially including a change from a state-based system of regulation to a system of federal regulation, the repeal of the McCarran Ferguson Act, and/or measures under the Dodd-Frank Act that establish the Federal Insurance Office and provide for a determination that a nonbank financial company presents systemic risk and therefore should be subject to heightened supervision by the Federal Reserve Board. It is not known how this federal office will coordinate and interact with the NAIC and state insurance regulators. Adoption or implementation of any of these measures may restrict our ability to conduct our insurance business, govern our corporate affairs or increase our cost of doing business.
 
The effects of such changes could adversely affect our results of operations. Please see Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves and Life Insurance Policy Reserves, for a discussion of our reserving practices.
 
Managing technology initiatives and meeting data security requirements are significant challenges.
While technology can streamline many business processes and ultimately reduce the costs of operations, technology initiatives present short-term cost and also have implementation and operational risks. In addition, we may have inaccurate expense projections, implementation schedules or expectations regarding the effectiveness and user acceptance of the end product. These issues could escalate over time. If we were unable to find and retain associates with key technical knowledge, our ability to develop and deploy key technology solutions could be hampered.
 
We necessarily collect, use and hold data concerning individuals and businesses with whom we have a relationship. Threats to data security, including unauthorized access and cyberattacks, rapidly emerge and change, exposing us to additional costs for protection or remediation and competing time constraints to secure our data in accordance with customer expectations and statutory and regulatory requirements.
 
While we take commercially reasonable measures to keep our systems and data secure, it is difficult or impossible to defend against every risk being posed by changing technologies as well as criminal and state-sponsored cybercrime and cyber threats. Increasing sophistication of cyber criminals and terrorists make keeping up with new threats difficult and could result in a breach. Patching and other measures to protect existing systems and servers could be inadequate, especially on systems that are being retired. Controls employed by our U.S., off-shore and cloud vendors could prove inadequate. We could also experience a breach by intentional or negligent conduct on the part of associates or other internal sources. Our systems and those of our third-party vendors may become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses, ransomware and malware.
 
A breach of our security or the security of a vendor that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs and reputational damage.
 
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ITEM 1B.    Unresolved Staff Comments
None
 
ITEM 2.    Properties
Cincinnati Financial Corporation owns our headquarters building located on 102 acres of land in Fairfield, Ohio. This building has 1,508,200 square feet of total space. The property, including land is recorded in our financial statements at $133 million at December 31, 2020, and is classified as land, building and equipment, net, for company use. John J. & Thomas R. Schiff & Co. Inc., a related party, occupies 8,034 square feet (less than 1%). This property is used for the operations described in the Consolidated Financial Statements and accompanying Notes.

Cincinnati Financial Corporation owns Gilmore Pointe, located on the northwest corner of our headquarters property. This four-story building contains approximately 103,000 square feet of usable space. The property is recorded in the financial statements at $5 million at December 31, 2020, and is classified as investment property in Other Invested Assets, net. At December 31, 2020, unaffiliated tenants occupied 86%, Cincinnati Financial affiliates occupied 14%.

The Cincinnati Insurance Company owns the CFC Winton Center used for multiple operations with approximately 48,000 square feet of total space, located approximately six miles from our headquarters. The property, including land, is recorded in our financial statements at $8 million at December 31, 2020, and is classified as land, building and equipment, net, for company use.

We lease office space located in London, United Kingdom, for our Cincinnati Global operations. We also lease office space throughout the United States to support our insurance operations.
 
ITEM 3.    Legal Proceedings
Neither the company nor any of our subsidiaries are involved in any litigation believed to be material other than ordinary, routine litigation incidental to the nature of our business.
 
ITEM 4.    Mine Safety Disclosures
This item is not applicable to the company.
 

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Part II
ITEM 5.    Market for the Registrant’s Common Equity, Related Stockholder Matters and
        Issuer Purchases of Equity Securities
Cincinnati Financial Corporation had approximately 183,000 shareholders of record as of December 31, 2020. While approximately 13,500 shareholders are registered, the majority of shareholders are beneficial owners whose shares are held in “street name” by brokers and institutional accounts. We believe many of our independent agent representatives and most of the 5,266 associates of our subsidiaries own the company’s common stock. Our common shares are traded under the symbol CINF on Nasdaq.

Cumulative Total Return
As depicted in the graph below, the five-year total return on a $100 investment made December 31, 2015, assuming the reinvestment of all dividends, was 70.5% for Cincinnati Financial Corporation’s common stock compared with 77.5% for the S&P Composite 1500 Property & Casualty Insurance Index and 103.0% for the S&P 500 Index.
 
The following graph depicts $100 invested on December 31, 2015, in stock or index, including reinvestment of dividends. The years shown represent each respective fiscal year ending December 31.
 
Comparison of Five-Year Cumulative Total Return
cinf-20201231_g1.jpg
The S&P 500 Index includes a representative sample of 500 leading companies in a cross section of industries of the U.S. economy. At year-end 2020, the S&P Composite 1500 Property & Casualty Insurance Index included 28 companies.

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Issuances and Purchases of Equity Securities
The following summarizes securities authorized for issuance under our equity compensation plans as of December 31, 2020:
Plan categoryNumber of securities to be
issued upon exercise of
outstanding options,
warrants and rights at
December 31, 2020
Weighted-average exercise
price of outstanding
options, warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plan (excluding
securities reflected in column (a)) at
December 31, 2020
 (a)(b)(c)
Equity compensation plans
approved by security holders
3,601,343 $72.55 7,078,200 
Equity compensation plans not
approved by security holders
— — — 
    Total3,601,343 $72.55 7,078,200 
 
The number of securities remaining available for future issuance includes: 6,727,521 shares available for issuance under the Cincinnati Financial Corporation 2016 Stock Compensation Plan (the 2016 Plan), 78,709 shares available for issuance under the Cincinnati Financial Corporation 2012 Stock Compensation Plan (the 2012 Plan), and 271,970 shares available for issuance of share grants under the Director’s Stock Plan of 2018. The number of securities remaining available for future issuance assumes the number of securities to be issued from performance-based awards are issued at the target-level performance level. Both the 2016 Plan and 2012 Plan allow for issuance of stock options, service-based or performance-based restricted stock units, stock appreciation rights or other equity-based grants. Awards other than stock options granted from the 2016 and 2012 plans are counted as three shares against the plan for each one share of common stock actually issued. Additional information about share-based associate compensation granted under our equity compensation plans is available in Item 8, Note 17 of the Consolidated Financial Statements.

We discuss the factors that affect our ability to pay cash dividends and repurchase shares in Item 7, Liquidity and Capital Resources. Regulatory restrictions on dividends our insurance subsidiaries can pay to the parent company are discussed in Item 8, Note 9 of the Consolidated Financial Statements.

The following summarizes shares purchased under our repurchase programs:
PeriodTotal number
of shares
purchased
Average
price paid
per share
Total number of shares
purchased as part of
publicly announced
plans or programs
Maximum number of
shares that may yet be
purchased under the
plans or programs
October 1-31, 2020— — — 12,376,785 
November 1-30, 2020— — — 12,376,785 
December 1-31, 202050,000 $81.15 50,000 12,326,785 
Totals50,000 81.15 50,000  
 
We did not sell any of our shares that were not registered under the Securities Act during 2020. Our repurchase program does not have an expiration date. Our repurchase program was expanded on January 26, 2018, by 15 million shares. We have 12,326,785 shares available for purchase under our programs at December 31, 2020.

Cincinnati Financial Corporation - 2020 10-K - Page 47


ITEM 6.    Selected Financial Data
(In millions, except per share data and shares outstanding in thousands)Years ended December 31,
 20202019201820172016
Consolidated Income Statement Data     
Earned premiums$5,980 $5,604 $5,170 $4,954 $4,710 
Investment income, net of expenses670 646 619 609 595 
Investment gains and losses, net *865 1,650 (402)148 124 
Total revenues7,536 7,924 5,407 5,732 5,449 
Net income1,216 1,997 287 1,045 591 
Net income per common share: 
Basic$7.55 $12.24 $1.76 $6.36 $3.59 
Diluted7.49 12.10 1.75 6.29 3.55 
Cash dividends per common share:
Ordinary declared2.40 2.24 2.12 2.00 1.92 
Ordinary paid2.36 2.21 2.09 1.98 1.90 
Special declared and paid — — 0.50 — 
Diluted weighted average shares162.4 165.1 164.5 166.0 166.5 
Consolidated Balance Sheet Data
Total investments$21,542 $19,746 $16,732 $17,051 $15,500 
Net unrealized investment portfolio gains5,955 4,761 2,598 3,540 2,625 
Deferred policy acquisition costs805 774 738 670 637 
Total assets27,542 25,408 21,935 21,843 20,386 
Gross loss and loss expense reserves6,746 6,147 5,707 5,273 5,085 
Life policy and investment contract reserves2,915 2,835 2,779 2,729 2,671 
Long-term debt788 788 788 787 787 
Shareholders' equity10,789 9,864 7,833 8,243 7,060 
Book value per share67.04 60.55 48.10 50.29 42.95 
Shares outstanding160,941 162,918 162,843 163,899 164,387 
Value creation ratio14.7 %30.5 %(0.1)%22.9 %14.5 %
Consolidated Property Casualty Operations Data
Earned premiums$5,691 $5,334 $4,920 $4,722 $4,482 
Unearned premiums2,959 2,787 2,515 2,403 2,306 
Gross loss and loss expense reserves6,677 6,088 5,646 5,219 5,035 
Investment income, net of expenses431 419 401 392 384 
Loss and loss expense ratio67.4 %62.8 %65.5 %66.4 %63.8 %
Underwriting expense ratio30.7 31.0 30.9 31.1 31.0 
Combined ratio98.1 %93.8 %96.4 %97.5 %94.8 %
 
*    Investment gains and losses are integral to our financial results over the long term, but our substantial discretion in the timing of investment sales may cause this value to fluctuate substantially. Also, applicable accounting standards require us to recognize gains and losses from changes in fair values of equity securities and changes in embedded derivatives without actual realization of those gains and losses. We discuss investment gains and losses for the past three years in Item 7, Investments Results.

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ITEM 7.    Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The purpose of Management’s Discussion and Analysis is to provide an understanding of Cincinnati Financial Corporation’s consolidated results of operations and financial condition. Our Management’s Discussion and Analysis should be read in conjunction with Item 6, Selected Financial Data, and Item 8, Consolidated Financial Statements and related Notes. We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and stock dividends.
 
We begin with an executive summary of our results of operations, followed by other highlights, an overview of our strategy, an outlook for future performance and details about critical accounting estimates. In several instances, we refer to estimated industry data so that we can provide information on our performance within the context of the overall insurance industry. Unless otherwise noted, the industry data is prepared by A.M. Best, a leading insurance industry statistical, analytical and financial strength rating organization. Information from A.M. Best is presented on a statutory accounting basis for insurance company regulation in the United States of America. When we provide our results on a comparable statutory accounting basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).

Through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on net written premium volume for the first nine months of 2020, among approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies in 45 states as discussed in Item 1, Our Business and Our Strategy.
 
The U.S. economy, the insurance industry and our company continue to face many challenges. Our long-term perspective has allowed us to address immediate challenges while also focusing on the major decisions that best position the company for success through all market cycles. We believe that this forward-looking view consistently benefits our shareholders, agents, policyholders and associates.
 
To measure our progress, we have defined a measure of value creation that we believe captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. We refer to this measure as our value creation ratio (VCR) and it is made up of two primary components: (1) our rate of growth in book value per share plus (2) the ratio of dividends declared per share to beginning book value per share. This measure, intended to be all-inclusive regarding changes in book value per share, uses originally reported book value per share in cases where book value per share has been adjusted, such as after the adoption of Accounting Standards Updates with a cumulative effect of a change in accounting.
 
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Executive Summary
Our value creation ratio, defined above, is our primary performance target. VCR trends are shown in the table below.
One
year
Three-year
% average
Five-year
% average
Value creation ratio:   
As of December 31, 202014.7 %15.0 %16.5 %
As of December 31, 201930.5 17.8 14.2 
As of December 31, 2018(0.1)12.4 10.7 
 
We are targeting an annual value creation ratio averaging 10% to 13% over the next five-year period. At 14.7% for 2020, our performance exceeded the high end of that range. We also exceeded the high end of it for both the three-year and five-year periods that ended in December 2020.

The table below shows the primary components of our value creation ratio on a percentage basis. Analysis of the components aids understanding of our financial performance. Our financial results are further analyzed in the Corporate Financial Highlights section below.
 Years ended December 31,2020-20192019-2018
 202020192018Pt. ChangePt. Change
Value creation ratio major components:   
Net income before investment gains5.5 %8.9 %7.4 %(3.4)1.5 
Change in fixed-maturity securities, realized and unrealized gains3.0 5.5 (3.2)(2.5)8.7 
Change in equity securities, investment gains7.5 16.6 (3.8)(9.1)20.4 
Other(1.3)(0.5)(0.5)(0.8)0.0 
Value creation ratio14.7 %30.5 %(0.1)%(15.8)30.6 
 
The 2020 value creation ratio decreased by 15.8 percentage points, compared with 2019, primarily due to a less favorable valuation for our investment portfolio, as shown in the table above. The increase in 2019, compared with 2018, was primarily due to a higher valuation for our investment portfolio. Operating results in 2019 contributed to VCR more than in 2018, despite a 0.7% contribution from certain non-recurring items in the 2018 ratio, including the impact of various tax accounting method changes.

We believe our value creation ratio is a useful measure. The table below shows calculations for VCR.
(Dollars are per share)Years ended December 31,
 202020192018
Value creation ratio:   
End of period book value*$67.04 $60.55 $48.10 
Less beginning of period book value60.55 48.10 50.29 
Change in book value6.49 12.45 (2.19)
Dividend declared to shareholders2.40 2.24 2.12 
Total value creation$8.89 $14.69 $(0.07)
Value creation ratio from change in book value**10.7 %25.9 %(4.3)%
Value creation ratio from dividends declared to shareholders***4.0 4.6 4.2 
Value creation ratio14.7 %30.5 %(0.1)%
* Book value per share is calculated by dividing end of period total shareholders' equity by end of period shares outstanding
** Change in book value divided by the beginning of year book value
*** Dividend declared to shareholders divided by beginning of year book value
 
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When looking at our longer-term objectives, we see three primary performance drivers for our value creation ratio: 
Premium growth – We believe over any five-year period our agency relationships and initiatives can lead to a property casualty written premium growth rate that exceeds the industry average. The compound annual growth rate of our net written premiums was 6.1% over the five-year period 2016 through 2020, exceeding the 4.6% estimated growth rate for the property casualty insurance 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 drive performance to achieve our underwriting profitability target of a GAAP combined ratio over any five-year period that consistently averages within the range of 95% to 100%. Our GAAP combined ratio averaged 96.1% over the five-year period 2016 through 2020, near the more favorable end of the performance target range. Performance as measured by the combined ratio is discussed in Consolidated Property Casualty Insurance Results. Our statutory combined ratio averaged 95.6% over the five-year period 2016 through 2020, compared with an estimated 100.6% for the property casualty industry. 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 total return of the S&P 500 Index.
Investment income growth, on a pretax basis, had a compound annual growth rate of 3.2% over the five-year period 2016 through 2020.
Over the five years ended December 31, 2020, our equity portfolio compound annual total return was 15.9% compared with a compound annual total return of 15.2% for the Index. Our equity portfolio favors larger-capitalization, high-quality, dividend-growing stocks with a slight value orientation. For the year 2020, our equity portfolio total return was 14.7%, compared with 18.4% for the Index.
 
The board of directors is committed to rewarding shareholders directly through cash dividends and share repurchase authorizations. Through 2020, the company has increased the annual cash dividend rate for 60 consecutive years, a record we believe is matched by only seven other publicly traded U.S. companies. In addition to regular dividends, strong capital and excellent company performance has provided opportunities to further reward shareholders, including a special dividend paid in December 2017. The board regularly evaluates relevant factors in dividend-related decisions, and the 2020 increase to the regular dividend reflected confidence in our strong capital, liquidity and financial flexibility, as well as progress through our initiatives to improve earnings performance while growing insurance premium revenues. We discuss our financial position in more detail in Liquidity and Capital Resources. 
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Corporate Financial Highlights
In addition to the value creation ratio discussion and analysis in the Executive Summary, we further analyze our financial results in the sections below.
 
Balance Sheet Data
(Dollars in millions, except share data)At December 31,At December 31,
 20202019
Total investments$21,542 $19,746 
Total assets27,542 25,408 
Short-term debt54 39 
Long-term debt788 788 
Shareholders' equity10,789 9,864 
Book value per share67.04 60.55 
Debt-to-total-capital ratio7.2 %7.7 %
 
Total investments increased by 9% during 2020 on a fair value basis, with an increase in our securities portfolio valuation that added to a 4% increase in its cost basis. Entering 2021, we believe the portfolio continues to be well diversified and is well positioned to withstand short-term fluctuations. We discuss our investment strategy in Item 1, Investments Segment, and results for the segment in Investments Results. Total assets rose 8%. Shareholders’ equity increased by 9% and book value per share increased by 11%, for reasons discussed in the preceding Executive Summary.
 
The amount of our debt obligations increased by $15 million in 2020, compared with 2019. Our 7.2% ratio of debt to total capital (debt plus shareholders’ equity) at year-end 2020 decreased by 0.5 percentage points compared with the prior-year ratio.
 
Income Statement and Per Share Data
(In millions, except per share data)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Earned premiums$5,980 $5,604 $5,170 7 
Investment income, net of expenses (pretax)670 646 619 4 
Investment gains and losses, net (pretax)865 1,650 (402)(48)nm
Total revenues7,536 7,924 5,407 (5)47 
Net income1,216 1,997 287 (39)596 
Comprehensive income1,537 2,423 24 (37)nm
Net income per share - diluted7.49 12.10 1.75 (38)591 
Cash dividends declared per share2.40 2.24 2.12 7 
Diluted weighted average shares outstanding162.4 165.1 164.5 (2)
 
Net income decreased by $781 million or 39% in 2020, compared with 2019, including a $620 million decrease for 2020 net investment gains after taxes. The decrease in 2020 net income also included a decrease in property casualty underwriting income of $175 million after taxes, as discussed below, and was partially offset by a $21 million increase in investment income after taxes. Our investment operation’s performance is discussed further in Investments Results. Net income in 2018 included a $56 million benefit from certain other non-recurring items, primarily the impact of various tax accounting method changes as disclosed in Item 8, Note 11 of the Consolidated Financial Statements.

During much of 2020, the novel coronavirus (SARS-CoV-2 or COVID-19), recognized as a pandemic by the World 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.
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As the pandemic unfolded, management met with the board of directors frequently to discuss matters such as our response to prioritize the health and safety of our associates, agents and policyholders. Discussion also included near-term and longer-term financial effects. As stay-at-home orders 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, responding to claims and performing other operational functions. They joined our field associates who already worked from home, providing agents and policyholders with outstanding service. At the end of 2020, nearly all of our associates continued to work from home.

The COVID-19 pandemic slowed the growth of our premium revenues for 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 past or future government-ordered actions, including moratoriums or deferral of premium payments related to our insurance policies, are uncertain and may further adversely affect premium growth.

During 2020, pandemic-related incurred losses and expenses totaled $85 million. The total included $30 million for legal expenses in defense of business interruption claims, $19 million for Cincinnati Re® losses, $12 million for Cincinnati Global Underwriting Ltd.SM (Cincinnati Global) losses, $8 million for credit losses related to uncollectible premiums and $16 million for the Stay-at-Home policyholder credit for personal auto policies.

Factors used in estimating reserves for business interruption legal expenses included estimates for attorney fees associated with the defense of such lawsuits filed against the company; litigation trends of such cases, including responding to amended and replead cases and cases on appeal; and trends in judicial decisions in cases filed against the company and other insurers.

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.

Most of our commercial property policies are written to preclude coverage for business interruption claims unless there is direct physical loss or damage to property. For this reason, most of our standard market commercial property policies in states where we actively write business do not contain a specific virus exclusion.

Loss experience for our insurance operations is influenced by many factors, as discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves. 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.

Net income in 2019 increased $1.710 billion, compared with 2018, primarily due to a $1.621 billion increase for 2019 in net investment gains after taxes and a $122 million increase in property casualty underwriting income after taxes.

As discussed in Investments Results, we reported a net investment gain in 2020, primarily due to an $841 million net favorable change in fair value for equity securities still held. In 2019, we reported a net investment gain, including $1.626 billion from a net favorable change in fair value for equity securities still held. For 2018, we reported a net investment loss, primarily due to unfavorable changes in fair values of equity securities, even though we continued to hold the securities.
 
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Contribution from Insurance Operations 
(Dollars in millions)Years ended December 31,2020-20192019-2018
202020192018Change %Change %
Consolidated property casualty data:
Net written premiums$5,864 $5,516 $5,030 6 10 
Earned premiums5,691 5,334 4,920 7 
Underwriting profit119 341 186 (65)83 
                Pt. ChangePt. Change
GAAP combined ratio98.1 %93.8 %96.4 %4.3 (2.6)
Statutory combined ratio96.7 93.4 96.0 3.3 (2.6)
Written premium to statutory surplus1.0 1.0 1.0 0.0 0.0 
 
Property casualty net written premiums grew 6% and earned premiums grew 7% in 2020, reflecting average renewal price increases and premium growth initiatives. The 2020 growth rate for net written premiums slowed and was 4 percentage points less than in 2019, reflecting the COVID-19 pandemic and related economic effects. Included in the 2019 growth rate was a contribution of 3 percentage points from Cincinnati Global. Trends and related factors are discussed in Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance Results, respectively.
 
We completed our transaction to acquire Cincinnati Global, a London-based global specialty underwriter for Lloyd's Syndicate 318, on February 28, 2019. We expect the transaction to contribute to future earnings and book value growth as we believe it should provide opportunities to support business produced by our independent agencies in new geographies and lines of business.

Our property casualty insurance operations generated an underwriting profit for each of the three years ending in 2020. The $222 million decrease in 2020, compared with 2019, included a $370 million increase in losses from catastrophe events and $121 million less benefit from net favorable reserve development on prior accident years before catastrophe losses. The $155 million improvement in 2019, compared with 2018, included a $25 million decrease in losses from natural catastrophe events and $69 million more benefit from net favorable reserve development on prior accident years before catastrophe losses.
 
We measure property casualty underwriting profitability primarily by the combined ratio. Our combined ratio measures the percentage of each earned premium dollar spent on claims plus all expenses related to our property casualty operations, all on a pretax basis. A lower ratio indicates more favorable results and better underlying performance. A ratio below 100% represents an underwriting profit. Initiatives to improve our combined ratio are discussed in Item 1, Our Business and Our Strategy, Strategic Initiatives. In 2020, 2019 and 2018, favorable development on reserves for claims that occurred in prior accident years helped offset other incurred losses and loss expenses. Reserve development is discussed further in Property Casualty Loss and Loss Expense Obligations and Reserves. Losses from weather-related catastrophes are another important item influencing the combined ratio and are discussed along with other factors in Financial Results for our property casualty business and related segments.
 
Our life insurance segment reported profit of $11 million in 2020 and $1 million in 2019. We discuss results for the segment in Life Insurance Results. Most of this segment’s investment income is included in our investments segment results. In addition to investment income, investment gains from the life insurance investment portfolio are also included in our investments segment results.
 
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Strategic Initiatives Overview
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. We discuss our long-term, proven strategy in Item 1, Our Business and Our Strategy. 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.
Drive premium growth – Implementation of these initiatives is intended to further penetrate each market we serve through our appointed 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 and Cincinnati Global. Diversified growth also may reduce variability of losses from weather-related catastrophes.

Detailed discussion of recent-year financial performance influenced by our strategic initiatives appears below in Financial Results and Liquidity and Capital Resources.

Factors Influencing Our Future Performance
Our view of the shareholder value we can create over the next five years relies largely on three assumptions – each highly dependent on the external environment. First, we anticipate our property casualty average insurance prices will increase in proportion to, or in excess of, our loss cost trends. Second, we assume that the economy can maintain a long-term growth track. Third, we assume that valuations of our marketable securities will vary within a typical range over time, based on historical trends. If those assumptions prove to be inaccurate, we may not be able to achieve our performance targets even if we accomplish our strategic objectives.
 
Other factors that could influence our ability to achieve our targets include:
We expect the insurance marketplace to remain competitive, which is likely to cause carriers to pursue strategies that they believe could lead to economies of scale, market share gains or the potential for an improved competitive posture.
We expect the independent insurance agency system to remain strong, with continued agency consolidation. If soft insurance market conditions return in the near term, it will create additional risk for agencies.
A return of soft insurance market pricing could significantly affect growth rates and earned premium levels for some time into the future. If the economy falters, we may experience low or no premium growth for our property casualty segments. Premium growth also may lag as some of our growth initiatives require more time to reach their full contribution. In addition, economic factors, including inflation, may increase our claims and settlement expenses related to medical care, litigation and construction.
Financial markets continued to display volatility in recent years, and some predict more turbulence in the future from effects such as changes in government policy, growth challenges for emerging country economies or other geopolitical events that could also affect the U.S. economy and markets. Should financial markets decline temporarily, which could occur as part of typical market volatility patterns, the related book value component of our value creation ratio could also register a weak or negative result.

We discuss in Item 1A, Risk Factors, many potential risks to our business and our ability to achieve our qualitative and quantitative objectives. These are real risks, but their probability of occurring may not be high. We also believe that our risk management programs generally could mitigate some of their potential effects, in the event they would occur.

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Critical Accounting Estimates
Cincinnati Financial Corporation’s financial statements are prepared using U.S. GAAP. These principles require management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates.
 
The significant accounting policies used in the preparation of the financial statements are discussed in Item 8, Note 1 of the Consolidated Financial Statements. In conjunction with that discussion, material implications of uncertainties associated with the methods, assumptions and estimates underlying the company’s critical accounting policies are discussed below. The audit committee of the board of directors reviews the annual financial statements with management and the independent registered public accounting firm. These discussions cover the quality of earnings, review of reserves and accruals, reconsideration of the suitability of accounting principles, review of highly judgmental areas including critical accounting estimates, audit adjustments and such other inquiries as may be appropriate.
 
Property Casualty Insurance Loss and Loss Expense Reserves
We establish loss and loss expense reserves for our property casualty insurance business as balance sheet liabilities. Unpaid loss and loss expenses are the estimated amounts necessary to pay for and settle all outstanding insured claims, including incurred but not reported (IBNR) claims. These reserves account for unpaid loss and loss expenses as of a financial statement date.
 
For some lines of business that we write, a considerable and uncertain amount of time can elapse between the occurrence, reporting and payment of insured claims. The amount we will actually have to pay for such claims also can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. Gross loss and loss expense reserves were $6.677 billion at year-end 2020 compared with $6.088 billion at year-end 2019.
 
How Reserves Are Established
Our field claims representatives establish case reserves when claims are reported to the company to provide for our unpaid loss and loss expense obligation associated with known claims. Field claims managers supervise and review all claims with case reserves less than $100,000. Additionally, a headquarters supervisor and regional claims manager review all claims under $100,000 if litigation or a certain specialty claim is involved. All claims with case reserves of $100,000 or greater are reviewed and approved by experienced headquarters supervisors and regional claims managers. Upper-level headquarters claims managers also review case reserves of $175,000 or more.
 
Our claims representatives base their case reserve estimates primarily upon case-by-case evaluations that consider:
type of claim involved
circumstances surrounding each claim
policy provisions pertaining to each claim
potential for subrogation or salvage recoverable
general insurance reserving practices

Case reserves of all sizes are subject to review on a 90-day cycle, or more frequently if new information about a loss becomes available. As part of the review process, we monitor industry trends, cost trends, relevant court cases, legislative activity and other current events in an effort to ascertain new or additional loss exposures.
 
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We also establish IBNR reserves to provide for all unpaid loss and loss expenses not accounted for by case reserves:
For events designated as natural catastrophes resulting in losses incurred related to premiums written on a direct basis by The Cincinnati Insurance Companies, we calculate IBNR reserves directly as a result of an estimated IBNR claim count and an estimated average claim amount for each event. Once case reserves are established for a catastrophe event, we reduce the IBNR reserves. Our claims department management coordinates the assessment of these events and prepares the related IBNR reserve estimates. Such an assessment involves a comprehensive analysis of the nature of the event, of policyholder exposures within the affected geographic area and of available claims intelligence. Depending on the nature of the event, available claims intelligence could include surveys of field claims associates within the affected geographic area, feedback from a catastrophe claims team sent into the area, as well as data on claims reported as of the financial statement date.
To determine whether an event is designated as a catastrophe, related to premiums written on a direct basis by The Cincinnati Insurance Companies, we generally use the catastrophe definition provided by Property Claims Service (PCS), a division of Insurance Services Office. PCS defines a catastrophe as an event that causes U.S., Puerto Rico and U.S. Virgin Islands damage of $25 million or more in insured property losses and affects a significant number of policyholders and insureds.
For events designated as natural catastrophes resulting in losses for Cincinnati Re and Cincinnati Global, we begin with a review of in-force policies, treaties and related limits likely to be affected by each event. For both Cincinnati Re and Cincinnati Global, use of information from third-party catastrophe models, industry estimates, and our own proprietary adjustments are utilized for the estimate of ultimate losses for each catastrophe event. Incurred losses from catastrophe events for both Cincinnati Re and Cincinnati Global can be designated catastrophes by PCS, or deemed as a catastrophe by the international insurance industry or, for Cincinnati Re, as reported by ceding companies. IBNR reserves are calculated as the difference between the estimate of the ultimate loss and loss expenses and the sum of total loss and loss expense payments and total case reserves.
For asbestos and environmental claims, we calculate IBNR reserves by deriving an actuarially-based estimate of total unpaid loss and loss expenses. We then reduce the estimate by total case reserves. We discuss the reserve analysis that applies to asbestos and environmental reserves in Liquidity and Capital Resources, Asbestos and Environmental Loss and Loss Expense Reserves.
For loss expenses that pertain primarily to salaries and other costs related to our claims department associates, also referred to as adjusting and other expense or AOE, we calculate reserves based on an analysis of the relationship between paid losses and paid AOE. Reserves for AOE are allocated to company, line of business and accident year based on a claim count algorithm. Claim counts reported and used in the reserving process are primarily measured by insurance coverages that are triggered when a loss occurs and a reserve is established. Coverages are defined as unique combinations of certain attributes such as line of business and cause of loss. Claims that are opened and closed without payment are included in the reported claim counts. Claim counts are presented on a direct basis only and do not reflect any assumed or ceded reinsurance.
For all other claims and events, including reinsurance assumed or ceded, IBNR reserves are calculated as the difference between an actuarial estimate of the ultimate cost of total loss and loss expenses incurred reduced by the sum of total loss and loss expense payments and total case reserves estimated for individual claims. Reserve amounts for those other claims and events are significant, and represent the majority of amounts shown as IBNR reserves and loss expense reserves in the table included in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves. We discuss below the development of actuarially based estimates of the ultimate cost of total loss and loss expenses incurred.

Our actuarial staff applies significant judgment in selecting models and estimating model parameters when preparing reserve analyses. Unpaid loss and loss expenses are inherently uncertain as to timing and amount. Uncertainties relating to model appropriateness, parameter estimates and actual loss and loss expense amounts are referred to as model, parameter and process uncertainty, respectively. Our management and actuarial staff address these uncertainties in the reserving process in a variety of ways.
 
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Our actuarial staff bases its IBNR reserve estimates for these losses primarily on the indications of methods and models that analyze accident year data. Accident year is the year in which an insured claim, loss or loss expense occurred. The specific methods and models that our actuaries have used for the past several years are:
paid and reported loss development methods
paid and reported loss Bornhuetter-Ferguson methods
individual and multiple probabilistic trend family models

Our actuarial staff uses diagnostics provided by stochastic reserving software to evaluate the appropriateness of the models and methods listed above. The software’s diagnostics have indicated that the appropriateness of these models and methods for estimating IBNR reserves for our lines of business tends to depend on a line’s tail. Tail refers to the time interval between a typical claim’s occurrence and its settlement. For our long-tail lines such as workers’ compensation, commercial casualty and certain other liability lines, models from the probabilistic trend family tend to provide superior fits and to validate well, compared with models underlying the loss development and Bornhuetter-Ferguson methods. The loss development and Bornhuetter-Ferguson methods, particularly the reported loss variations, tend to produce the more appropriate IBNR reserve estimates for our short-tail lines such as homeowner and commercial property. For our mid-tail lines such as personal and commercial auto liability, all models and methods provide useful insights.
 
Our actuarial staff also devotes significant time and effort to the estimation of model and method parameters. The loss development and Bornhuetter-Ferguson methods require the estimation of numerous loss development factors. The Bornhuetter-Ferguson methods also involve the estimation of numerous expected loss ratios by accident year. Models from the probabilistic trend family require the estimation of development trends, calendar year inflation trends and exposure levels. Consequently, our actuarial staff monitors a number of trends and measures to gain key business insights necessary for exercising appropriate judgment when estimating the parameters mentioned, such as: 
company and industry pricing
company and industry exposure
company and industry loss frequency and severity
past large loss events
company and industry premium
company in-force policy count

These trends and measures also support the estimation of expected accident year loss ratios needed for applying the Bornhuetter-Ferguson methods and for assessing the reasonability of all IBNR reserve estimates computed. Our actuarial staff reviews these trends and measures quarterly, updating parameters derived from them as necessary.
 
Quarterly, our actuarial staff summarizes their reserve analysis by preparing an actuarial best estimate and a range of reasonable IBNR reserves intended to reflect the uncertainty of the estimate. An inter-departmental committee that includes our actuarial management team reviews the results of each quarterly reserve analysis. The committee establishes management’s best estimate of IBNR reserves, which is the amount that is included in each period’s financial statements. In addition to the information provided by actuarial staff, the committee also considers factors such as:
large loss activity and trends in large losses
new business activity
judicial decisions
general economic trends such as inflation
trends in litigiousness and legal expenses
product and underwriting changes
changes in claims practices

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The determination of management’s best estimate, like the preparation of the reserve analysis that supports it, involves considerable judgment. Changes in reserving data or the trends and factors that influence reserving data may signal fundamental shifts or may simply reflect single-period anomalies. Even if a change reflects a fundamental shift, the full extent of the change may not become evident until years later. Moreover, since our methods and models do not explicitly relate many of the factors we consider directly to reserve levels, we typically cannot quantify the precise impact of such factors on the adequacy of reserves prospectively or retrospectively.
 
Due to the uncertainties described above, our ultimate loss experience could prove better or worse than our carried reserves reflect. To the extent that reserves are inadequate and increased, the amount of the increase is a charge in the period that the deficiency is recognized, raising our loss and loss expense ratio and reducing earnings. To the extent that reserves are redundant and released, the amount of the release is a credit in the period that the redundancy is recognized, reducing our loss and loss expense ratio and increasing earnings.
 
Key Assumptions – Loss Reserving
Our actuarial staff makes a number of key assumptions when using their methods and models to derive IBNR reserve estimates. Appropriate reliance on these key assumptions essentially entails determinations of the likelihood that statistically significant patterns in historical data may extend into the future. The four most significant of the key assumptions used by our actuarial staff and approved by management are:
Emergence of loss and defense and cost containment expenses, also referred to as DCCE, on an accident year basis. Historical paid loss, reported loss and paid DCCE data for the business lines we analyze contain patterns that reflect how unpaid losses, unreported losses and unpaid DCCE as of a financial statement date will emerge in the future. Unless our actuarial staff or management identifies reasons or factors that invalidate the extension of historical patterns into the future, these patterns can be used to make projections necessary for estimating IBNR reserves. Our actuaries significantly rely on this assumption in the application of all methods and models mentioned above.
Calendar year inflation. For long-tail and mid-tail business lines, calendar year inflation trends for future paid losses and paid DCCE do not vary significantly from a stable, long-term average. Our actuaries base reserve estimates derived from probabilistic trend family models on this assumption.
Exposure levels. Historical earned premiums, when adjusted to reflect common levels of product pricing and loss cost inflation, can serve as a proxy for historical exposures. Our actuaries require this assumption to estimate expected loss ratios and expected DCCE ratios used by the Bornhuetter-Ferguson reserving methods. They may also use this assumption to establish exposure levels for recent accident years, characterized by “green” or immature data, when working with probabilistic trend family models.
Claims having atypical emergence patterns. Characteristics of certain subsets of claims, such as high frequency, high severity, or mass tort claims, have the potential to distort patterns contained in historical paid loss, reported loss and paid DCCE data. When testing indicates this to be the case for a particular subset of claims, our actuaries segregate these claims from the data and analyze them separately. Subsets of claims that could fall into this category include hurricane claims or claims for other weather events where total losses we incurred were very large, individual large claims and asbestos and environmental claims.

These key assumptions have not changed since 2005, when our actuarial staff began using probabilistic trend family models to estimate IBNR reserves.
 
Paid losses, reported losses and paid DCCE are subject to random as well as systematic influences. As a result, actual paid losses, reported losses and paid DCCE are virtually certain to differ from projections. Such differences are consistent with what specific models for our business lines predict and with the related patterns in the historical data used to develop these models. As a result, management does not closely monitor statistically insignificant differences between actual and projected data.
 
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Reserve Estimate Variability
Management believes that the standard error of a reserve estimate, a measure of the estimate’s variability, provides the most appropriate measure of the estimate’s sensitivity. The reserves we establish depend on the models we use and the related parameters we estimate in the course of conducting reserve analyses. However, the actual amount required to settle all outstanding insured claims, including IBNR claims, as of a financial statement date depends on stochastic, or random, elements as well as the systematic elements captured by our models and estimated model parameters. For the lines of business we write, process uncertainty – the inherent variability of loss and loss expense payments – typically contributes more to the imprecision of a reserve estimate than parameter uncertainty.
 
Consequently, a sensitivity measure that ignores process uncertainty would provide an incomplete picture of the reserve estimate’s sensitivity. Since a reserve estimate’s standard error accounts for both process and parameter uncertainty, it reflects the estimate’s full sensitivity to a range of reasonably likely scenarios.
 
The table below provides standard errors and reserve ranges by major property casualty lines of business and in total for net loss and loss expense reserves as well as the potential effects on our net income, assuming a 21% federal tax rate. Standard errors and reserve ranges for assorted groupings of these lines of business cannot be computed by simply adding the standard errors and reserve ranges of the component lines of business, since such an approach would ignore the effects of product diversification. See Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves, Range of Reasonable Reserves, for more details on our total reserve range. While the table reflects our assessment of the most likely range within which each line’s actual unpaid loss and loss expenses may fall, one or more lines’ actual unpaid loss and loss expenses could nonetheless fall outside of the indicated ranges.

(Dollars in millions)Net loss and loss expense range of reserves 
 Carried reservesLow pointHigh pointStandard errorNet income
effect
 
At December 31, 2020     
Total$6,400 $5,859 $6,543 $342 $270 
Commercial casualty$2,348 $2,029 $2,518 $245 $194 
Commercial property468 381 476 48 38 
Commercial auto736 694 767 37 29 
Workers' compensation964 803 979 88 70 
Personal auto298 280 316 18 14 
Homeowners236 219 253 17 13 
 
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Life Policy and Investment Contract Reserves
We establish the reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates and investment yields, including a provision for uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. We use both our own experience and industry experience adjusted for historical trends in arriving at our assumptions for expected mortality and morbidity. We use our own experience and historical trends for setting our assumptions for expected withdrawal rates and expenses. We base our assumptions for expected investment income on our own experience adjusted for current and future expected economic conditions.
 
We establish reserves for our universal life, deferred annuity and investment contracts equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life insurance policies contain no-lapse guarantee provisions. For these policies, we establish a reserve in addition to the account balance based on expected no-lapse guarantee benefits and expected policy assessments.
 
Asset Impairment
Our investment portfolio is our largest asset. We monitor the fixed-maturity portfolio and all other assets for signs of credit-related or other impairment. We monitor decreases in the fair value of invested assets and the need for an allowance for credit losses for our fixed-maturity portfolio; allowances for expected credit losses on receivable and recoverable assets considering past events, current conditions and reasonable and supportable forecasts; an accumulation of company costs in excess of the amount originally expected to acquire or construct an asset; or other factors such as bankruptcy, deterioration of creditworthiness, failure to pay interest; and changes in legal factors or in the business climate.
 
The application of our invested assets impairment policy resulted in write-downs of impaired securities intended to be sold that reduced our income before income taxes by $78 million in 2020, and other-than-temporary impairment (OTTI) charges of $9 million in 2019 and $5 million in 2018. Write-downs and OTTI losses represent noncash charges to income and are reported as investment losses. The application of our non-invested assets impairment policy did not have a material effect on our financial condition and included a pandemic-related allowance for credit losses for uncollectible premiums of $8 million.

Our internal investment portfolio managers monitor their assigned portfolios. If a fixed-maturity security is valued below amortized cost, the portfolio managers undertake additional reviews. Such declines often occur in conjunction with events taking place in the overall economy and market, combined with events specific to the industry or operations of the issuing organization. Managers review quantitative measurements such as a declining trend in fair value and the extent of the fair value decline, as well as qualitative measures such as pending events, credit ratings and issuer liquidity. We are even more proactive when these declines in valuation are greater than might be anticipated when viewed in the context of overall economic and market conditions. We provide detailed information about fixed-maturity securities fair valued in a continuous loss position at year-end 2020 in Item 7A, Quantitative and Qualitative Disclosures About Market Risk.

An available for sale fixed maturity is impaired if the fair value of the security is below amortized cost. The impaired loss is charged to net income when we have the intent to sell the security or it is more likely than not we will be required to sell the security before recovery of the amortized cost. For impaired securities we intend to hold, an allowance for credit related losses is recorded in investment losses when the company determines a credit loss has been incurred based on certain factors such as adverse conditions, credit rating downgrades or failure of the issuer to make scheduled principal or interest payments. A credit loss is determined using a discounted cash flow analysis by comparing the present value of expected cash flows with the amortized cost basis, limited to the difference between fair value and amortized cost. Noncredit losses are recognized in other comprehensive income as a change in unrealized gains and losses on investments. We provide information about valuations of our invested assets in Item 8, Note 2 of the Consolidated Financial Statements.


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Fair Value Measurements
 
Valuation of Financial Instruments
Fair value is defined as the exit price or the amount that would be (1) received to sell an asset or (2) paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date. When determining an exit price, we must, whenever possible, rely upon observable market data.
 
We have categorized our financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level that is significant to the fair value measurement of the instrument. While we consider pricing data from outside services, we ultimately determine whether the data or inputs used by these outside services are observable or unobservable.
 
Financial assets and liabilities recorded in the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as described in Item 8, Note 3 of the Consolidated Financial Statements.
 
Level 1 and Level 2 Valuation Techniques
Substantially all of the $21.194 billion of securities in our investment portfolio at year-end 2020, measured at fair value, are classified as Level 1 or Level 2. Financial assets that fall within Level 1 and Level 2 are priced according to observable data from identical or similar securities that have traded in the marketplace. Also within Level 2 are securities that are valued by outside services or brokers where we have evaluated and verified the pricing methodology and determined that the inputs are observable.
 

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Deferred Policy Acquisition Costs
We establish a deferred asset for expenses associated with successfully acquiring property casualty and life insurance policies, primarily commissions, premium taxes and underwriting costs. Underlying assumptions are updated periodically to reflect actual experience, and we evaluate our deferred acquisition cost recoverability.
 
For property casualty insurance policies, deferred acquisition costs are amortized over the terms of the policies. These costs are principally agent commissions, premium taxes and certain underwriting costs related to successful contract acquisition, which are deferred and amortized into net income as premiums are earned. We assess recoverability of deferred acquisition costs at a level consistent with the way we acquire, service and manage insurance policies and measure profitability. Deferred acquisition costs track with the change in premiums.
 
For life insurance policies, acquisition costs are amortized into income in proportion to premium revenue, benefit base or in accordance with the recognition of gross profit from the contract, depending on the policy type. These costs are principally agent commissions and underwriting costs related to successful contract acquisition. We analyze our acquisition cost assumptions periodically to reflect actual experience; we evaluate our deferred acquisition costs for recoverability; and we regularly conduct reviews for potential premium deficiencies or loss recognition. Changes in the amounts or timing of estimated future profits could result in adjustments to the accumulated amortization of these costs.
 
Recent Accounting Pronouncements
Information about recent accounting pronouncements is provided in Item 8, Note 1 of the Consolidated Financial Statements.
 
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Financial Results
Consolidated financial results primarily reflect the results of our five reporting segments. These segments are defined based on financial information we use to evaluate performance and to determine the allocation of assets.
Commercial lines insurance
Personal lines insurance
Excess and surplus lines insurance
Life insurance
Investments

We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. In addition, Other includes the financial results of our reinsurance assumed operations, known as Cincinnati Re, and our London-based global specialty underwriter known as Cincinnati Global.
 
We measure profit or loss for our commercial lines, personal lines, excess and surplus lines and life insurance segments based upon underwriting results (profit or loss), which represent net earned premium less loss and loss expenses, or contract holders’ benefits incurred, and underwriting expenses on a pretax basis. We also evaluate results for our consolidated property casualty insurance operations. That is the total of our standard market segments (commercial lines and personal lines), our excess and surplus lines insurance segment, Cincinnati Re and Cincinnati Global. For analysis of our consolidated property casualty insurance results, it is important to include the earned premiums, loss and loss expenses and also underwriting expenses reported as Other. Underwriting results and segment pretax operating income are not substitutes for net income determined in accordance with GAAP.
 
For our consolidated property casualty insurance operations as well as the insurance segments, statutory accounting data and ratios are key performance indicators that we use to assess business trends and to make comparisons to industry results, since GAAP-based industry data generally is not as readily available.
 
Investments held by the parent company and the investment portfolios for the insurance subsidiaries are managed and reported as the investments segment, separate from our underwriting business. Net investment income and net investment gains and losses for our investment portfolios are discussed in the Investments Results.
 
The calculations of segment data are described in more detail in Item 8, Note 18, of the Consolidated Financial Statements. The following sections provide analysis and discussion of results of operations for each of the five segments.
 
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Consolidated Property Casualty Insurance Results
Earned and net written premiums for our consolidated property casualty operations grew in 2020, reflecting average renewal price increases and strategic initiatives for targeted growth. A key measure of property casualty profitability is underwriting profit or loss. Our 2020 underwriting profit of $119 million was $222 million less than in 2019, including a $370 million unfavorable effect from a higher amount of catastrophe losses, mostly caused by severe weather, and $85 million of pandemic-related incurred losses and expenses. Pandemic-related amounts were discussed in more detail in Corporate Financial Highlights of Management’s Discussion and Analysis. Prior accident year loss experience before catastrophes during 2020 was less favorable than in 2019, and represented $121 million of the underwriting profit decrease from 2019. The various less favorable effects in 2020 offset improved profitability from factors such as higher pricing and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices. Underwriting profit trends are discussed further below.
 
The table below highlights property casualty results, with analysis and discussion in the sections that follow. That analysis and discussion includes sections by segment.
Overview – Three-Year Highlights
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Earned premiums$5,691 $5,334 $4,920 7 
Fee revenues9 11 11 (18)
Total revenues5,700 5,345 4,931 7 
Loss and loss expenses from:     
Current accident year before catastrophe losses3,243 3,249 3,026 0 
Current accident year catastrophe losses725 351 364 107 (4)
Prior accident years before catastrophe losses(98)(219)(150)55 (46)
Prior accident years catastrophe losses(33)(29)(17)(14)(71)
Loss and loss expenses3,837 3,352 3,223 14 
Underwriting expenses1,744 1,652 1,522 6 
Underwriting profit$119 $341 $186 (65)83 
Ratios as a percent of earned premiums:Pt. ChangePt. Change
Current accident year before catastrophe losses57.0 %60.9 %61.5 %(3.9)(0.6)
Current accident year catastrophe losses12.7 6.6 7.4 6.1 (0.8)
Prior accident years before catastrophe losses(1.7)(4.1)(3.1)2.4 (1.0)
Prior accident years catastrophe losses(0.6)(0.6)(0.3)0.0 (0.3)
Loss and loss expenses67.4 62.8 65.5 4.6 (2.7)
Underwriting expenses30.7 31.0 30.9 (0.3)0.1 
Combined ratio98.1 %93.8 %96.4 %4.3 (2.6)
Combined ratio:98.1 %93.8 %96.4 %4.3 (2.6)
Contribution from catastrophe losses and prior years
reserve development
10.4 1.9 4.0 8.5 (2.1)
Combined ratio before catastrophe losses and prior years
reserve development
87.7 %91.9 %92.4 %(4.2)(0.5)
 
The COVID-19 pandemic and related economic effects slowed the rate of our premium growth in 2020. Consolidated property casualty net written premiums grew 6% in the second quarter, 3% in the third quarter and 7% in the fourth quarter, following growth of 10% for both the first quarter of 2020 and full-year 2019. In addition to reduced insured exposure levels that affected some lines of business, commercial lines new business written premiums for the last three quarters of 2020 decreased compared with the same periods a year ago, and contributed to the slowed growth in net written premiums.

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For policies that renewed during 2020, higher average pricing offset some of the factors that slowed premium growth. 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.

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 2020 decreased by 12% compared with 2019. We believe some of the decrease in those paid losses is due to slower business activity during the pandemic for some businesses we insure, or other pandemic-related factors such as less miles driven for insured vehicles. The commercial lines insurance segment decreased by 12% and the personal lines insurance segment decreased by 18%. As a ratio to earned premiums, consolidated property casualty 2020 paid losses before catastrophe effects were 7.8 percentage points lower than the same period a year ago, but were largely offset by the change in loss reserves that increased by 5.4 points. 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.

Performance highlights for consolidated property casualty operations also included:
Premiums – Agency renewal written premiums rose $221 million in 2020 and continued to contribute to growth in earned premiums and net written premiums that rose in each of our property casualty segments. The renewal premium increase was largely due to average renewal price increases. Price increases with enhanced precision continue to benefit operating results.
New business written premiums produced through agencies increased $21 million in 2020, compared with 2019. Agents appointed during 2020 or 2019 produced a 2020 increase in standard lines new business of $52 million. Growth initiatives also favorably affect growth in subsequent years, particularly as newer agency relationships mature over time.
Expansion of Cincinnati Re produced $302 million of 2020 net written premiums and contributed $74 million of the growth in other written premiums, compared with 2019. 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. In 2020, earned premiums for Cincinnati Re totaled $259 million.
Cincinnati Global also contributed to the increase in other written premiums, following our acquisition of it on February 28, 2019. Net written premiums were $177 million in 2020, and contributed $37 million of the growth in other written premiums, compared with 2019. In 2020, earned premiums for Cincinnati Global totaled $168 million.
Other written premiums also include premiums ceded to reinsurers as part of our ceded reinsurance program. An increase in ceded premiums, other than Cincinnati Re and Cincinnati Global premiums, reduced net written premium growth by $1 million in 2020.
The table below analyzes premium revenue components and trends.
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Agency renewal written premiums$4,740 $4,519 $4,358 5 
Agency new business written premiums799 778 652 3 19 
Other written premiums325 219 20 48 nm
Net written premiums5,864 5,516 5,030 6 10 
Unearned premium change(173)(182)(110)5 (65)
Earned premiums$5,691 $5,334 $4,920 7 
 
Combined ratio – The combined ratio increased by 4.3 percentage points in 2020, compared with 2019, including a 6.1 percentage-point increase in the ratio for catastrophe losses and a 1.5 point increase from pandemic-related incurred losses and expenses. The 2020 ratio for current accident year losses and loss expenses before catastrophes improved by 3.9 percentage points, reflecting lower paid losses discussed above, a decrease in commercial lines large losses for new losses above $1 million described below, and what we believe are improvements to some of our loss experience due to recent-year initiatives to improve pricing precision and claims and loss control practices. The remainder of the 2020 combined ratio increase included 2.4 percentage
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points less benefit in the ratio for prior accident year losses and loss expenses before catastrophes. We further discuss ratios related to reserve development in the sections that follow the Catastrophe Losses Incurred table below.
Our statutory combined ratio was 96.7% in 2020 compared with 93.4% in 2019 and 96.0% in 2018. The estimated statutory combined ratio for the property casualty industry, with the industry’s ratio excluding its mortgage and financial guaranty lines of business, was 99.3% in 2020, 99.2% in 2019 and 99.6% in 2018. The contribution of catastrophe losses to our statutory combined ratio was 11.2 percentage points in 2020, 6.0 percentage points in 2019 and 7.1 percentage points in 2018, compared with industry estimates of 7.5, 4.1 and 5.7 percentage points, respectively. Components of the combined ratio are discussed below.
Catastrophe loss trends are an important factor in assessing trends for overall underwriting results. Our 10-year historical annual average contribution of catastrophe losses to the combined ratio was 7.6 percentage points at December 31, 2020. Our five-year average was 8.1 percentage points.

Effective June 1, 2020, we restructured and renewed our combined property catastrophe occurrence excess of loss treaty for a period of one year. 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 catastrophe losses are not applicable to the treaty. Cincinnati Re purchases additional reinsurance coverages with various triggers and unique features. As of June 1, 2020, Cincinnati Re had separate property catastrophe excess of loss coverage with a total available aggregate limit of $30 million.

There was no recovery from reinsurers for losses during 2020 pertaining to the treaty effective June 1, 2020. There was no recovery from reinsurers for losses during 2020 or 2019 pertaining to the treaty effective July 1, 2019. For the treaty effective in July 2018, the aggregate recovery from reinsurers totaled $14 million for incurred losses in 2019, after considering all applicable deductibles, due to adverse reserve development in our personal lines insurance segment from a California wildfire event that occurred during 2018, exhausting the $50 million aggregate limit. During 2018, the aggregate recovery from reinsurers providing coverage totaled $36 million, which was applied to two California wildfire events, including $21 million for Cincinnati Re.

The following table shows catastrophe losses incurred for the past two calendar years, net of reinsurance, as well as the effect of loss development on prior period catastrophe reserves. We individually list declared catastrophe events for which our incurred losses reached or exceeded $10 million.

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Catastrophe Losses Incurred
(Dollars in millions, net of reinsurance)   Excess and surplus lines 
   Commercial linesPersonal lines 
DatesEventsRegionsOtherTotal
2020      
Jan. 10-12Flood, hail, windMidwest, Northeast, South$6 $4 $ $ $10 
Feb. 5-8Flood, hail, windNortheast, South9 5   14 
Mar. 2-4Flood, hail, windMidwest, South58 8  5 71 
Mar. 27-30Flood, hail, windMidwest, Northeast, South21 14   35 
Apr. 7-9Flood, hail, windMidwest, Northeast, South29 29   58 
Apr. 10-14Flood, hail, windMidwest, Northeast, South22 27  1 50 
May 4-5Flood, hail, windMidwest, South22 5   27 
May 26 - Jun. 8Civil unrestMidwest, Northeast, South, West16  1 5 22 
Jul. 10-12Flood, hail, windMidwest, South15 13   28 
Jul. 30 - Aug. 5Flood, hail, windInternational, South, Northeast6 19  1 26 
Aug. 8-11Flood, hail, windMidwest84 20 1  105 
Aug. 26-28Flood, hail, windSouth (Laura)2 2  41 45 
Sep. 7-16WildfireWest9 4   13 
Sep. 14-18Flood, hail, windSouth (Sally)8 4  25 37 
Oct. 9-12Flood, hail, windSouth (Delta) 1  14 15 
Oct. 28-29Flood, hail, windSouth (Zeta)7 15  9 31 
Nov. 15-16Flood, hail, windMidwest, Northeast, South4 6   10 
Dec. 25ExplosionSouth20    20 
All other 2020 catastrophes 38 57 3 10 108 
Development on 2019 and prior catastrophes(14)(8) (11)(33)
Calendar year incurred total $362 $225 $5 $100 $692 
2019      
Jan. 29 - Feb. 1Flood, ice, snow, windMidwest, Northeast$$10 $— $— $19 
Feb. 23-26Flood, freezing, hail, ice, snow, windMidwest, Northeast, South10 — — 19 
Mar. 12-17Flood, hail, ice, snow, windMidwest, Northeast, West, South— 12 
May 16-17Flood, hail, windMidwest— — 13 
May 26 - 28Flood, hail, windMidwest, Northeast, West, South71 29 — — 100 
Aug. 4-5Flood, hail, windMidwest— — 12 
Aug. 10-11Flood, hail, windWest22 — — 23 
Aug. 28 - Sep. 6Flood, hail, windSouth, International (Dorian)— 11 15 
Oct. 7-20TyphoonInternational (Hagibis)— — — 12 12 
Oct. 20-21Flood, hail, windMidwest, South23 — — 27 
All other 2019 catastrophes 41 47 10 99 
Development on 2018 and prior catastrophes(25)— (6)(29)
Calendar year incurred total $151 $139 $$31 $322 

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Consolidated Property Casualty Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. For all property casualty lines of business in aggregate, net loss and loss expense reserves at December 31, 2020, were $654 million higher than at year-end 2019, including $533 million for incurred but not reported (IBNR) reserves. The $654 million reserve increase raised year-end 2019 net loss and loss expense reserves by 11%, compared with a 7% increase in 2020 earned premiums.

Most of the incurred losses and loss expenses shown in the consolidated property casualty insurance results three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than half of our consolidated property casualty current accident year incurred losses and loss expenses represents net paid amounts, the majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 67.5% accident year 2019 loss and loss expense ratio reported as of December 31, 2019, developed favorably by 1.5 percentage points to 66.0% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2020. Accident years 2019 and 2018 have both developed favorably, as indicated by the progression over time for the ratios in the table.

(Dollars in millions)      
Accident year loss and loss expenses incurred and ratios to earned premiums:   
Accident year:202020192018202020192018
as of December 31, 2020$3,968 $3,519 $3,245 69.7 %66.0 %66.0 %
as of December 31, 2019 3,600 3,301  67.5 67.1 
as of December 31, 2018  3,390   68.9 
 
Catastrophe loss trends, discussed above, accounted for some of the movement in the current accident year loss and loss expense ratio for 2020, compared with 2019. Catastrophe losses added 12.7 percentage points in 2020, 6.6 points in 2019 and 7.4 points in 2018 to the respective consolidated property casualty current accident year loss and loss expense ratios in the table above.
 
The 57.0% ratio for current accident year loss and loss expenses before catastrophe losses for 2020 decreased 3.9 percentage points compared with the 60.9% accident year 2019 ratio measured as of December 31, 2019. Contributors to the decrease included a 0.6 percentage-point reduction in the ratio for current accident year losses of $1 million or more per claim, shown in the table below, and lower paid losses discussed above.
 
Reserve development on prior accident years continued to net to a favorable amount in 2020, and was primarily due to less-than-anticipated loss emergence on known claims. We recognized $131 million of favorable development in 2020, compared with $248 million in 2019 and $167 million in 2018. Of the $117 million decrease in 2020, compared with 2019, $62 million was attributable to our commercial casualty and workers' compensation lines of business. Approximately 83% of our net favorable reserve development on prior accident years recognized during 2020 occurred in our commercial casualty, workers’ compensation and commercial property lines of business. In 2019, our commercial casualty, commercial property, workers' compensation and personal auto lines of business were responsible for approximately 83% of the favorable reserve development. As discussed in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves, Property Casualty Insurance Development of Estimated Reserves by Accident Year, commercial casualty and workers' compensation are considered long-tail lines with the potential for revisions inherent in estimating reserves. Favorable development recognized during 2018 was primarily from our commercial casualty, commercial property and workers’ compensation lines of business. Development by accident year is further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.
 
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Consolidated Property Casualty Insurance Losses by Size
(Dollars in millions, net of reinsurance)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Current accident year losses greater than $5,000,000$50 $27 $43 85 (37)
Current accident year losses $1,000,000-$5,000,000202 243 218 (17)11 
Large loss prior accident year reserve development42 50 69 (16)(28)
Total large losses incurred294 320 330 (8)(3)
Losses incurred but not reported310 50 110 nm(55)
Other losses excluding catastrophe losses1,909 2,118 1,886 (10)12 
Catastrophe losses670 309 334 117 (7)
Total losses incurred$3,183 $2,797 $2,660 14 
Ratios as a percent of earned premiums:   Pt. ChangePt. Change
Current accident year losses greater than $5,000,0000.9 %0.5 %0.9 %0.4 (0.4)
Current accident year losses $1,000,000-$5,000,0003.6 4.6 4.4 (1.0)0.2 
Large loss prior accident year reserve development0.7 0.9 1.4 (0.2)(0.5)
Total large loss ratio5.2 6.0 6.7 (0.8)(0.7)
Losses incurred but not reported5.5 0.9 2.2 4.6 (1.3)
Other losses excluding catastrophe losses33.4 39.7 38.4 (6.3)1.3 
Catastrophe losses11.8 5.8 6.8 6.0 (1.0)
Total loss ratio55.9 %52.4 %54.1 %3.5 (1.7)
 
In 2020, total large losses incurred decreased by $26 million, or 8%, net of reinsurance, primarily due to a decrease for our commercial lines insurance segment. The corresponding ratio decreased 0.8 percentage points. The large loss data included in the table above does not include Cincinnati Re and Cincinnati Global. Our analysis of large losses incurred indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility 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 volatility in addition to general inflationary trends in loss costs.
 
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Consolidated Property Casualty Insurance Underwriting Expenses
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Commission expenses$1,042 $989 $911 5 
Other underwriting expenses692 651 599 6 
Policyholder dividends10 12 12 (17)
Total underwriting expenses$1,744 $1,652 $1,522 6 
Ratios as a percent of earned premiums:   Pt. ChangePt. Change
Commission expenses18.3 %18.6 %18.5 %(0.3)0.1 
Other underwriting expenses12.2 12.2 12.1 0.0 0.1 
Policyholder dividends0.2 0.2 0.3 0.0 (0.1)
Total underwriting expense ratio30.7 %31.0 %30.9 %(0.3)0.1 
 
Consolidated property casualty commission expenses rose $53 million, or 5%, in 2020, with profit-sharing commissions for agencies decreasing by $10 million. The 2020 ratio of commission expenses as a percent of earned premiums decreased by 0.3 percentage points, compared with 2019. The 2020 ratio for other underwriting expenses matched 2019, as a Stay-at-Home policyholder credit for personal auto policies offset favorable effects such as a lower level of business travel spending for associates and earned premiums that rose at a slightly faster pace than other underwriting expenses. During 2020, we continued to carefully manage expenses while also making strategic investments that include enhancement of underwriting expertise.
 
Commission expenses include our profit-sharing commissions, which are primarily based on one-year and three-year profitability of an agency’s business. The aggregate profit trend for agencies that earn these profit-based commissions can differ from the aggregate profit trend for all agencies reflected in our consolidated property casualty results.
 
Salaries, benefits and payroll taxes for our associates account for approximately half of our property casualty other underwriting expenses. Most of our associates either provide direct service to the property casualty portion of our agencies’ businesses or provide support to those associates.
 
Discussions below of our property casualty insurance segments provide additional details about our results.

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Commercial Lines Insurance Results
 
Overview – Three-Year Highlights
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Earned premiums$3,476 $3,319 $3,218 5 
Fee revenues3 (40)
Total revenues3,479 3,324 3,223 5 
Loss and loss expenses from:    
Current accident year before catastrophe losses2,055 2,046 1,998 0 
Current accident year catastrophe losses376 176 208 114 (15)
Prior accident years before catastrophe losses(81)(167)(136)51 (23)
Prior accident years catastrophe losses(14)(25)(21)44 (19)
Loss and loss expenses2,336 2,030 2,049 15 (1)
Underwriting expenses1,079 1,053 1,023 2 
Underwriting profit$64 $241 $151 (73)60 
Ratios as a percent of earned premiums:   Pt. ChangePt. Change
Current accident year before catastrophe losses59.2 %61.7 %62.1 %(2.5)(0.4)
Current accident year catastrophe losses10.8 5.3 6.5 5.5 (1.2)
Prior accident years before catastrophe losses(2.3)(5.0)(4.2)2.7 (0.8)
Prior accident years catastrophe losses(0.4)(0.8)(0.7)0.4 (0.1)
Loss and loss expenses67.3 61.2 63.7 6.1 (2.5)
Underwriting expenses31.0 31.7 31.7 (0.7)0.0 
Combined ratio98.3 %92.9 %95.4 %5.4 (2.5)
Combined ratio:98.3 %92.9 %95.4 %5.4 (2.5)
Contribution from catastrophe losses and prior years
reserve development
8.1 (0.5)1.6 8.6 (2.1)
Combined ratio before catastrophe losses and prior years
reserve development
90.2 %93.4 %93.8 %(3.2)(0.4)
 
While earned premiums increased 5% in 2020, the COVID-19 pandemic and related economic effects slowed the pace of net written premium growth for our commercial lines insurance segment. Net written premiums grew 4%, compared with 2019. The rate of growth for several major lines of business was less in 2020, compared with the respective 2019 growth rate, including commercial property down 3 percentage points, commercial auto down 4 points and workers' compensation down by 5 points, while commercial casualty was up 2 percentage points. 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.

Loss experience for our insurance operations is influenced by many factors, and higher catastrophe losses were the main driver of the 2020 increase in losses and loss expenses, compared with 2019. Pandemic-related amounts totaled approximately $36 million and were discussed in more detail in Corporate Financial Highlights of Management’s Discussion and Analysis. For 2020, loss experience before catastrophe effects for our commercial lines insurance segment continued to improve. The main contributor of the improvement was the ratio for accident year 2020 loss and loss expenses before catastrophe losses. The improvement was driven by our commercial casualty and commercial auto lines of business, while commercial property increased by 1.1 points and workers' compensation increased by 0.9 points. The unfavorable change for commercial property included 3.0 points for $30 million of legal expenses for defense of business interruption claims, related to the pandemic, incurred during 2020. The unfavorable change for workers' compensation reflected average percentage price changes that have decreased in the mid-single-digit range in several recent quarters.

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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.

Performance highlights for the commercial lines insurance segment also included:
Premiums – Earned premiums and net written premiums rose in 2020, including a $124 million increase in renewal written premiums that continued to include higher average pricing. New business written premiums in 2020 increased $5 million, or 1%, compared with 2019.
Combined ratio – The 2020 combined ratio increased by 5.4 percentage points compared with 2019, including a 5.9 percentage-point increase in the ratio component for catastrophe losses. Development on prior accident years’ loss and loss expense reserves before catastrophes during 2020 was 2.7 percentage points less favorable than in 2019.
As discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, stable historical paid loss patterns are a key assumption used to make projections necessary for estimating IBNR reserves. During 2017, we observed paid losses or re-estimates of case reserves emerging at levels higher than expected for commercial casualty, our largest commercial line of business. Considering that new data at December 31, 2017, we estimated commercial casualty IBNR reserves for accident year 2017 at levels more likely to be adequate, and reported net adverse reserve development on prior accident years for calendar year 2017 for that line of business. For 2020, 2019 and 2018, commercial casualty reserve development on prior accident years was favorable, as discussed below. Our commercial casualty 2020 total loss and loss expense ratio was 0.4 percentage points better than in 2019, and in 2019 it was 2.3 percentage points better than in 2018.
Pricing precision and other initiatives to improve commercial lines underwriting profitability complement our business practices that continue to leverage the local presence of our field associates. Field marketing representatives meet with local agencies to assess each risk, determine limits of insurance and establish appropriate terms and conditions. They underwrite new business, with collaboration and expertise from headquarters associates as needed, while field loss control, machinery and equipment and claims representatives conduct on-site inspections. Field claims representatives also assist underwriters by preparing full reports on their first-hand observations of risk quality.
Our commercial lines statutory combined ratio was 97.5% in 2020, compared with 92.3% in 2019 and 95.1% in 2018. The contribution of catastrophe losses to our commercial lines statutory combined ratio was 10.4 percentage points in 2020, 4.5 percentage points in 2019 and 5.8 percentage points in 2018.

Commercial Lines Insurance Premiums
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Agency renewal written premiums$3,122 $2,998 $2,925 4 
Agency new business written premiums515 510 417 1 22 
Other written premiums(103)(98)(97)(5)(1)
Net written premiums3,534 3,410 3,245 4 
Unearned premium change(58)(91)(27)36 (237)
Earned premiums$3,476 $3,319 $3,218 5 
 
We continue to refine our use of predictive analytics tools to improve pricing precision as we further segment commercial lines policies, emphasizing identification and retention of policies we believe have relatively stronger price adequacy. These tools better align individual insurance policy pricing to risk attributes, providing our underwriters with enhanced abilities to target profitability and to discuss pricing impacts with agency personnel. We also continue to leverage our local relationships with agents through the efforts of our teams that work closely with them. We believe our field focus is unique and has several advantages, including providing us with quality intelligence on local market conditions. We seek to maintain appropriate pricing discipline for both new and renewal business as management continues to emphasize the importance of our agencies and underwriters assessing account quality to make careful decisions on a case-by-case basis whether to write or renew a policy. Premium rate credits may be used to retain renewals of quality business and to earn new business, but we do so selectively in order to avoid commercial accounts that we believe have insufficient profit margins.
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Our 4% increase in 2020 agency renewal written premiums included higher average pricing. We measure average changes in commercial lines renewal pricing as the 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. In 2020, our standard commercial lines policies averaged an estimated pricing change at a percentage in the mid-single-digit range, compared with a low-single-digit range in 2019. Our average commercial lines pricing change includes the flat pricing effect of 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, the average commercial lines pricing change we report reflects a blend of policies that did not expire and other policies that did expire during the measurement period.

For only those commercial lines policies that did expire and were then renewed during 2020, we estimate that the average price increase was near the high end of the mid-single-digit range. During 2020, we continued to further segment our commercial lines policies, emphasizing identification and retention of policies we believed had relatively stronger price adequacy. Conversely, we continued to seek more aggressive renewal terms and conditions on policies we believed had relatively weaker pricing, in turn retaining fewer of those policies.

Changes in the economy can affect insured exposures that directly relate to premium amounts charged for some policies. For commercial accounts, we usually calculate initial estimates for general liability premiums based on estimated sales or payroll volume, while we calculate workers’ compensation premiums based on estimated payroll volume. A change in sales or payroll volume generally indicates a change in demand for a business’s goods or services, as well as a change in its exposure to risk. Policyholders who experience sales or payroll volume changes due to economic factors may also have other exposures requiring insurance, such as commercial auto or commercial property. Premium levels for these other types of coverages generally are not linked directly to sales or payroll volumes.
 
Premiums resulting from audits of actual sales or payrolls that confirmed or adjusted initial premium estimates are part of net written premiums and earned premiums. The contribution to our commercial lines earned premiums was $41 million, $65 million and $70 million in 2020, 2019 and 2018, respectively. The contribution on a net written premiums basis was $53 million, $65 million and $70 million in 2020, 2019 and 2018, respectively. These net written premium amounts are included with agency renewal written premiums in the Commercial Lines Insurance Premiums table above.
 
In 2020, our commercial lines new business premiums written by our agencies increased $5 million, or 1%, compared with 2019. The rate of growth in 2020 was much slower than in 2019, reflecting increased competition that resulted in fewer opportunities to write policies at pricing levels we believed were adequate. New business premium volume in recent years has been significantly influenced by new agency appointments. Agencies appointed since the beginning of 2019 produced commercial lines new business written premiums of $55 million, in aggregate, during 2020, up $39 million from what they produced during 2019. All other agencies contributed the remaining $460 million, down $34 million from the $494 million they produced in 2019.

For new business, our field associates are frequently in our agents’ offices to: help judge the quality of each account; emphasize the Cincinnati value proposition; call on sales prospects with those agents; carefully evaluate risk exposure; and provide their best quotes. Some of our new business comes from accounts that are not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that is new to us and the agency. As we appoint new agencies who choose to move accounts to us, we report these accounts as new business to us.

Other written premiums primarily consist of premiums that are ceded to reinsurers and lower our net written premiums. An increase in ceded premiums reduced net written premium growth by $3 million in 2020.

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Commercial Lines Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. Most of the incurred losses and loss expenses shown in the commercial lines insurance segment three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than half of our commercial lines insurance segment current accident year incurred losses and loss expenses represents net paid amounts, the majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 67.0% accident year 2019 loss and loss expense ratio reported as of December 31, 2019, developed favorably by 1.6 percentage points to 65.4% due to claims settling for less than previously estimated, or due to updates to reserve estimates for unpaid claims, as of December 31, 2020. Accident years 2019 and 2018 for the commercial lines insurance segment have both developed favorably, as indicated by the progression over time of the ratios in the table.
(Dollars in millions)      
Accident year loss and loss expenses incurred and ratios to earned premiums:   
Accident year:202020192018202020192018
as of December 31, 2020$2,431 $2,171 $2,095 70.0 %65.4 %65.1 %
as of December 31, 2019 2,222 2,139  67.0 66.5 
as of December 31, 2018  2,206   68.6 
 
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain some of the movement in the current accident year loss and loss expense ratio for accident year 2020, compared with 2019. Catastrophe losses added 10.8 percentage points in 2020, 5.3 points in 2019 and 6.5 points in 2018 to the respective commercial lines current accident year loss and loss expense ratios in the table above.

The 59.2% ratio for current accident year loss and loss expenses before catastrophe losses for 2020 decreased 2.5 percentage points compared with the 61.7% accident year 2019 ratio measured as of December 31, 2019. Contributors to the decrease included less large losses incurred, described below, and the corresponding ratios for new losses above $1 million, with a 1.0 percentage-point decrease to the 2020 ratio, and lower paid losses discussed in Consolidated Property Casualty Insurance Results. Other contributions included favorable effects from various initiatives, such as those to improve pricing precision and loss experience related to claims and loss control practices.
 
Commercial lines reserve development on prior accident years of $95 million in 2020 continued to net to a favorable amount and provided a smaller benefit than the $192 million recognized in 2019. The $97 million net decrease in 2020 included $24 million and $38 million from our commercial casualty and workers' compensation lines of business, respectively. Most of our commercial lines net favorable reserve development on prior accident years recognized during 2020 occurred in our commercial casualty and workers’ compensation lines of business. Favorable development recognized during 2019 and 2018 was also mostly from our commercial casualty and workers’ compensation lines of business. Development by accident year and other trends for commercial lines loss and loss expenses and the related ratios are further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.
 
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Commercial Lines Insurance Losses by Size
(Dollars in millions, net of reinsurance)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Current accident year losses greater than $5,000,000$50 $27 $37 85 (27)
Current accident year losses $1,000,000-$5,000,000135 185 182 (27)
Large loss prior accident year reserve development36 49 65 (27)(25)
Total large losses incurred221 261 284 (15)(8)
Losses incurred but not reported240 26 64 nm(59)
Other losses excluding catastrophe losses1,073 1,222 1,122 (12)
Catastrophe losses350 142 180 146 (21)
Total losses incurred$1,884 $1,651 $1,650 14 
Ratios as a percent of earned premiums:   Pt. ChangePt. Change
Current accident year losses greater than $5,000,0001.4 %0.8 %1.2 %0.6 (0.4)
Current accident year losses $1,000,000-$5,000,0004.0 5.6 5.6 (1.6)0.0 
Large loss prior accident year reserve development1.0 1.5 2.0 (0.5)(0.5)
Total large loss ratio6.4 7.9 8.8 (1.5)(0.9)
Losses incurred but not reported6.9 0.8 2.0 6.1 (1.2)
Other losses excluding catastrophe losses30.8 36.7 34.9 (5.9)1.8 
Catastrophe losses10.1 4.3 5.6 5.8 (1.3)
Total loss ratio54.2 %49.7 %51.3 %4.5 (1.6)
 
In 2020, total large losses incurred decreased by $40 million, or 15%, net of reinsurance. The corresponding ratio decreased 1.5 percentage points. The 2020 decreases on both a dollar and ratio basis were largely due to lower amounts for our commercial casualty and commercial property lines of business. In 2019, total large losses incurred and the corresponding ratio were lower than in 2018, largely due to lower amounts of large losses for our commercial casualty line of business. Our analysis indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility 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 volatility in addition to general inflationary trends in loss costs.
 
Commercial Lines Insurance Underwriting Expenses
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Commission expenses$625 $614 $592 2 
Other underwriting expenses444 427 419 4 
Policyholder dividends10 12 12 (17)
Total underwriting expenses$1,079 $1,053 $1,023 2 
Ratios as a percent of earned premiums:   Pt. ChangePt. Change
Commission expenses18.0 %18.5 %18.4 %(0.5)0.1 
Other underwriting expenses12.7 12.9 12.9 (0.2)0.0 
Policyholder dividends0.3 0.3 0.4 0.0 (0.1)
Total underwriting expense ratio31.0 %31.7 %31.7 %(0.7)0.0 
 
Commercial lines commission expenses as a percent of earned premiums decreased in 2020, compared with 2019, primarily due to a decrease in the ratio for profit-sharing commissions for agencies that reflected a higher amount of catastrophe losses. The ratio for 2019 increased compared with 2018, reflecting an increase in the ratio for agency profit-sharing commissions. In 2020, other underwriting expenses as a percent of earned premiums decreased, compared with 2019, primarily due to a lower level of business travel spending for associates and earned premiums that rose at a slightly faster pace than other underwriting expenses, in addition to ongoing expense management. In 2019, the ratio matched 2018.
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Commercial Lines Insurance Outlook
Renewal and new business pricing for commercial risks continues to experience significant competitive pressure, reinforcing the need for enhanced pricing analytics and careful risk selection. Commentary regarding the commercial lines market within the property casualty insurance industry indicates commercial lines pricing in 2021 may be generally higher than in 2020. Despite challenging market conditions from strong competition, we believe we can manage our business and execute strategic initiatives to offset market pressures and profitably grow our commercial lines insurance segment.

We are building commercial lines for an even larger percentage of our agencies total portfolio, whether it’s through expansion of our local field presence, enhanced expertise or flexibility in processes and service. Our goal is to be the first and last solution when our agencies are considering business placement.
 
We intend to keep marketing our products to a broad range of business classes with a total account approach, while also continuing improvement of our pricing precision and further segmentation among commercial lines policies. We intend to maintain our underwriting discipline and carefully manage our rate levels as well as our programs that seek to accurately match exposures with appropriate premiums. We will continue to evaluate each risk on a policy-by-policy basis, making decisions about rates, terms and conditions based on each account’s individual characteristics. For our commercial auto line of business, we will continue to improve premium rate classification and the use of sophisticated rating variables in risk selection and pricing. We believe that our initiatives to improve pricing precision and lower loss costs will continue to benefit commercial lines profitability during 2021, and that recent-year premium growth initiatives will continue to grow commercial lines premiums at a healthy pace.

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Personal Lines Insurance Results
 
Overview – Three-Year Highlights
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Earned premiums$1,463 $1,404 $1,336 4 
Fee revenues4 0 (20)
Total revenues1,467 1,408 1,341 4 
Loss and loss expenses from:    
Current accident year before catastrophe losses762 875 838 (13)
Current accident year catastrophe losses233 137 121 70 13 
Prior accident years before catastrophe losses(10)(29)66 nm
Prior accident years catastrophe losses(8)nm(50)
Loss and loss expenses977 985 972 (1)
Underwriting expenses443 415 389 7 
Underwriting profit (loss)$47 $$(20)488 nm
Ratios as a percent of earned premiums:   Pt. ChangePt. Change
Current accident year before catastrophe losses52.1 %62.4 %62.8 %(10.3)(0.4)
Current accident year catastrophe losses16.0 9.7 9.1 6.3 0.6 
Prior accident years before catastrophe losses(0.7)(2.1)0.6 1.4 (2.7)
Prior accident years catastrophe losses(0.6)0.2 0.3 (0.8)(0.1)
Loss and loss expenses66.8 70.2 72.8 (3.4)(2.6)
Underwriting expenses30.3 29.6 29.1 0.7 0.5 
Combined ratio97.1 %99.8 %101.9 %(2.7)(2.1)
Combined ratio:97.1 %99.8 %101.9 %(2.7)(2.1)
Contribution from catastrophe losses and prior years
reserve development
14.7 7.8 10.0 6.9 (2.2)
Combined ratio before catastrophe losses and prior years
reserve development
82.4 %92.0 %91.9 %(9.6)0.1 
 
The COVID-19 pandemic did not have a significant effect on our personal lines insurance segment premiums in 2020. Net written premiums grew 5% in 2020, following growth of 4% in 2019. 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 second-quarter 2020 underwriting expense.

Loss experience for our insurance operations is influenced by many factors. During the last three quarters of 2020, loss experience for our personal auto line of business improved, largely due to a reduction in personal auto reported claims resulting from reduced driving during 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.

Performance highlights for the personal lines insurance segment also included:
Premiums – Earned premiums and net written premiums continued to grow in 2020, primarily due to increases in renewal written premiums that reflected higher average pricing. Renewal written premiums rose $52 million, or 4%, in 2020, compared with 2019. Net written premiums from high net worth policies totaled approximately $519 million in 2020, compared with $408 million in 2019.
Combined ratio – The 2020 combined ratio improved by 2.7 percentage points, compared with 2019, despite a 5.5 percentage-point increase in the ratio for 2020 natural catastrophe losses. Development on prior accident
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years’ loss and loss expense reserves before catastrophes during 2020 was 1.4 percentage points less favorable than in 2019.
We have increased our pricing precision and implemented numerous rate increases in recent years to improve our personal lines insurance segment results. In addition, we have made greater use of higher minimum loss deductibles and enhanced our property inspection processes to verify condition and insurance to value. We have worked to improve our geographic diversification by expanding our personal lines operation to several states less prone to catastrophes.
Our personal lines statutory combined ratio was 96.4% in 2020, compared with 99.3% in 2019 and 101.2% in 2018. The contribution of catastrophe losses to our personal lines statutory combined ratio was 15.4 percentage points in 2020, 9.9 percentage points in 2019 and 9.4 percentage points in 2018.
 
Personal Lines Insurance Premiums
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Agency renewal written premiums$1,364 $1,312 $1,241 4 
Agency new business written premiums174 158 165 10 (4)
Other written premiums(35)(35)(28)0 (25)
Net written premiums1,503 1,435 1,378 5 
Unearned premium change(40)(31)(42)(29)26 
Earned premiums$1,463 $1,404 $1,336 4 
 
Personal lines insurance is a strategic component of our overall relationship with most of our agencies and is an important component of our agencies’ relationships with their clients. We believe agents recommend our personal insurance products to their clients who seek to balance quality and price and who are attracted by our superior claims service and the benefits of our package approach. We also believe our continuing efforts to improve pricing precision are helping us attract and retain more of our agencies’ preferred business, while also obtaining higher rates for more thinly priced business.
 
The 4% increase in agency renewal written premiums in 2020 reflected various rate changes. We estimate that premium rates for our personal auto line of business increased at average percentages in the mid-single-digit range during 2020, with some individual policies experiencing lower or higher rate changes based on enhanced pricing precision enabled by predictive models that consider characteristics of specific risks. For our homeowner line of business, we estimate that rate increases during 2020 averaged near the high end of the mid-single-digit range, higher than in 2019. Similar to our personal auto line of business, that average varied widely by state, and some individual policies experienced lower or higher rate changes based on pricing precision and current rate level indications that helped determine appropriate premium rates.
 
Personal lines new business written premiums grew by $16 million, or 10%, during 2020, compared with 2019. The growth reflects multiple factors, including a slowing effect of more stringent underwriting and pricing efforts in selected states during 2019, while maintaining discipline. It also reflects expanded use of enhanced pricing precision tools, including excess and surplus lines homeowner policies we began offering in early 2020. Those homeowner policies contributed $8 million in 2020. 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.

Other written premiums primarily consist of premiums that are ceded to reinsurers and lower our net written premiums. A decrease in ceded premiums favorably impacted net written premium growth by $3 million in 2020.
 
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Personal Lines Insurance Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. Most of the incurred losses and loss expenses shown in the personal lines insurance segment three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since approximately two-thirds of our personal lines current accident year incurred losses and loss expenses represent net paid amounts, the remaining one-third represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 72.1% accident year 2019 loss and loss expense ratio reported as of December 31, 2019, developed favorably by 1.5 percentage points to 70.6% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2020. Accident years 2019 and 2018 for the personal lines insurance segment have both developed favorably, as indicated by the progression over time for the ratios in the table.
(Dollars in millions)   
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident year:202020192018202020192018
as of December 31, 2020$995 $991 $946 68.1 %70.6 %70.8 %
as of December 31, 2019 1,012 950  72.1 71.1 
as of December 31, 2018  959   71.9 
 
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain much of the movement in the current accident year loss and loss expense ratio for accident year 2020, compared with accident year 2019. Catastrophe losses added 16.0 percentage points in 2020, 9.7 points in 2019 and 9.1 points in 2018 to the respective personal lines current accident year loss and loss expense ratios in the table above. Personal lines catastrophe losses for 2020 resulted in a ratio higher than our 10.4% 10-year annual average for personal lines that included 22.8% for 2011. Personal lines catastrophe losses are inherently volatile, as discussed above and in Consolidated Property Casualty Insurance Results.
 
The 52.1% ratio for current accident year loss and loss expenses before catastrophe losses for 2020 improved 10.3 percentage points compared with the 62.4% accident year 2019 ratio measured as of December 31, 2019. Some of the improvement was due to lower paid losses discussed in Consolidated Property Casualty Insurance Results. The improvement was partially offset by a 0.4 percentage-point increase in the ratio for current accident year losses of $1 million or more per claim, shown in the table below. Other contributions included favorable effects from various initiatives, such as those to improve pricing precision and loss experience related to claims and loss control practices.
 
Personal lines loss and loss expense reserve development on prior accident years recognized in 2020 was favorable by $18 million, in aggregate, compared with $27 million in 2019. The 2020 net favorable reserve development included $15 million for our personal auto line of business and $5 million for our homeowner line of business. The 2019 net favorable reserve development included $26 million for our personal auto line of business, primarily for accident year 2018. In 2018, our homeowner line of business prior accident year net reserve development was unfavorable by $24 million and was partially offset by favorable reserve development for personal auto. Development by accident year and other trends for personal lines loss and loss expenses and the related ratios are further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.
 
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Personal Lines Insurance Losses by Size
(Dollars in millions, net of reinsurance)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Current accident year losses greater than $5,000,000$ $— $nm(100)
Current accident year losses $1,000,000-$5,000,00059 51 32 16 59 
Large loss prior accident year reserve development6 (1)nmnm
Total large losses incurred65 50 42 30 19 
Losses incurred but not reported39 17 38 129 (55)
Other losses excluding catastrophe losses523 662 650 (21)
Catastrophe losses216 135 122 60 11 
Total losses incurred$843 $864 $852 (2)
Ratios as a percent of earned premiums:   Pt. ChangePt. Change
Current accident year losses greater than $5,000,0000.0 %0.0 %0.4 %0.0 (0.4)
Current accident year losses $1,000,000-$5,000,0004.0 3.6 2.4 0.4 1.2 
Large loss prior accident year reserve development0.4 (0.1)0.4 0.5 (0.5)
Total large loss ratio4.4 3.5 3.2 0.9 0.3 
Losses incurred but not reported2.7 1.2 2.8 1.5 (1.6)
Other losses excluding catastrophe losses35.8 47.2 48.7 (11.4)(1.5)
Catastrophe losses14.7 9.6 9.1 5.1 0.5 
Total loss ratio57.6 %61.5 %63.8 %(3.9)(2.3)
 
In 2020, personal lines total large losses incurred increased by $15 million, or 30%, net of reinsurance. The ratio for 2020 large losses as a percent of earned premiums increased 0.9 percentage points. The 2020 increases on both a dollar and ratio basis were primarily due to higher amounts for our homeowner line of business and umbrella coverage in our other personal line of business. In 2019, total large losses increased, compared with 2018, primarily due to higher amounts for our homeowner line of business. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility 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 volatility in addition to general inflationary trends in loss costs.
 
Personal Lines Insurance Underwriting Expenses
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Commission expenses$266 $259 $243 3 
Other underwriting expenses177 156 146 13 
Total underwriting expenses$443 $415 $389 7 
Ratios as a percent of earned premiums:   Pt. ChangePt. Change
Commission expenses18.2 %18.5 %18.2 %(0.3)0.3 
Other underwriting expenses12.1 11.1 10.9 1.0 0.2 
Total underwriting expense ratio30.3 %29.6 %29.1 %0.7 0.5 
 
Personal lines commission expense as a percent of earned premiums decreased in 2020, compared with 2019, including a decrease in the ratio for profit-sharing commissions for agencies that reflected a higher amount of catastrophe losses. The ratio for 2019 increased compared with 2018, largely due to an increase in the ratio for profit-sharing commissions for agencies. In 2020, other underwriting expenses as a percent of earned premiums increased, compared with 2019, primarily 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 premium growth outpacing growth in other expenses. Other underwriting expenses as a percent of earned premiums in 2019 increased slightly compared with 2018.
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Personal Lines Insurance Outlook
A.M. Best indicates 2020 personal lines direct written premiums for the U.S. property casualty industry grew approximately 1%. Growth for our personal lines insurance segment direct written premiums in 2020 exceeded the industry by approximately 3 percentage points, and we believe it will likely be higher than industry projections for 2021. Drivers of our growth include rate increases, new state entry, accelerated pace of new agency appointments in recent years and increased focus on the high net worth personal lines market.

Our high net worth initiative, along with various other actions to improve performance in our personal lines insurance segment, is discussed in greater detail in Personal Lines Insurance Results and also in Item 1, Our Business and Our Strategy, Strategic Initiatives and Our Segments, Personal Lines Insurance Segment.

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Excess and Surplus Lines Insurance Results
 
Overview – Three-Year Highlights
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Earned premiums$325 $278 $234 17 19 
Fee revenues2 0 100 
Total revenues327 280 235 17 19 
Loss and loss expenses from:     
Current accident year before catastrophe losses187 152 126 23 21 
Current accident year catastrophe losses5 400 (50)
Prior accident years before catastrophe losses7 (11)(24)nm54 
Prior accident years catastrophe losses — — 0 
Loss and loss expenses199 142 104 40 37 
Underwriting expenses94 85 68 11 25 
Underwriting profit$34 $53 $63 (36)(16)
Ratios as a percent of earned premiums:   Pt. ChangePt. Change
Current accident year before catastrophe losses57.7 %54.6 %53.9 %3.1 0.7 
Current accident year catastrophe losses1.3 0.4 1.1 0.9 (0.7)
Prior accident years before catastrophe losses2.1 (4.1)(10.6)6.2 6.5 
Prior accident years catastrophe losses0.2 0.2 0.0 0.0 0.2 
Loss and loss expenses61.3 51.1 44.4 10.2 6.7 
Underwriting expenses28.7 30.4 29.1 (1.7)1.3 
Combined ratio90.0 %81.5 %73.5 %8.5 8.0 
Combined ratio:90.0 %81.5 %73.5 %8.5 8.0 
Contribution from catastrophe losses and prior years
reserve development
3.6 (3.5)(9.5)7.1 6.0 
Combined ratio before catastrophe losses and prior years
reserve development
86.4 %85.0 %83.0 %1.4 2.0 
 
The COVID-19 pandemic did not have a significant effect on our excess and surplus lines insurance segment premiums during 2020, as net written premiums grew 15%. Premium growth could slow significantly if the basis for policy premiums, such as sales revenue for businesses we insure, decrease as a result of a weakened economy.

Loss experience for our insurance operations is influenced by many factors. We have not determined any material effect on our loss experience for 2020 as a result of the pandemic. Because of factors that reduce exposure to certain insurance losses, such as reduced sales revenue 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 for businesses we insure.

Our excess and surplus lines insurance segment includes results of The Cincinnati Specialty Underwriters Insurance Company and CSU Producer Resources Inc. Performance highlights for this segment also included:
Premiums – Earned premiums and net written premiums continued to grow during 2020, including higher renewal written premiums that included average renewal estimated price increases in the mid-single-digit range. New business written premiums in 2020 matched 2019 and reflected a highly competitive market, particularly for larger policies.
Combined ratio – The combined ratio rose 8.5 percentage points in 2020, primarily due to unfavorable reserve development on prior accident years. The increase reflects more prudent reserving, as claims on average are remaining open longer than previously expected. Components of the 9.3 percentage-point increase in 2020 for the total of loss and loss expense ratios before catastrophe losses, shown in the table above, include an IBNR
Cincinnati Financial Corporation - 2020 10-K - Page 83


portion that increased by 7.8 points and a case incurred portion that increased by 1.5 points. The paid component of the case incurred portion increased by 1.1 percentage points.

Excess and Surplus Lines Insurance Premiums
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Agency renewal written premiums$254 $209 $192 22 
Agency new business written premiums110 110 70 0 57 
Other written premiums(16)(16)(13)0 (23)
Net written premiums348 303 249 15 22 
Unearned premium change(23)(25)(15)8 (67)
Earned premiums$325 $278 $234 17 19 
 
The $45 million increase in 2020 renewal premiums reflected the opportunity to renew many policies for the first time as well as higher renewal pricing. Average renewal estimated price increases were in the mid-single-digit range during 2020. We measure average changes in excess and surplus lines renewal pricing as the 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 in 2020 matched 2019, as a highly competitive market offset rising premium rates and our additional marketing efforts. The high rate of growth in 2019 was largely due to more opportunities in the marketplace to write policies with annual premiums of $10,000 or more. In 2020, our underwriters saw fewer opportunities to write larger policies at pricing levels that we believed were adequate. Other written premiums in 2020 matched 2019, and are primarily premiums that are ceded to reinsurers and therefore reduce our net written premiums.
 
Excess and Surplus Lines Loss and Loss Expenses
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses, as well as the associated loss expenses. The majority of the total incurred losses and loss expenses shown above in the three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than 20% of our excess and surplus lines current accident year incurred losses and loss expenses represents net paid amounts, a large majority represents reserves for our estimate of unpaid losses and loss expenses. These reserves develop over time, and we update our estimates of previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 55.0% accident year 2019 loss and loss expense ratio reported as of December 31, 2019, developed favorably by 0.7 percentage points to 54.3% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2020. Accident year 2018 for this segment developed favorably during 2019 but during 2020 developed unfavorably, as indicated by the progression over time of the ratios in the table.
(Dollars in millions)   
Accident year loss and loss expenses incurred and ratios to earned premiums:
Accident year:202020192018202020192018
as of December 31, 2020$192 $151 $123 59.0 %54.3 %52.6 %
as of December 31, 2019 153 122  55.0 52.4 
as of December 31, 2018  128   55.0 
 
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain some of the movement among components of the current accident year loss and loss expense ratio for accident year 2020, compared with 2019. Catastrophe losses added 1.3 percentage points in 2020, 0.4 percentage points in 2019 and 1.1 percentage points in 2018 to the respective excess and surplus lines current accident year loss and loss expense ratios in the table above.
 
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The 57.7% ratio for current accident year loss and loss expenses before catastrophe losses for 2020 increased by 3.1 percentage points compared with the 54.6% accident year 2019 ratio measured as of December 31, 2019. The increase included more prudent reserving discussed above and no change in the ratio for current accident year losses of $1 million or more per claim, shown in the table below.

Excess and surplus lines reserve development on prior accident years was a net unfavorable $7 million in 2020, compared with a favorable net amount of $11 million in 2019. The net amount for 2020 included $2 million of favorable development in aggregate for accident years 2017 through 2019, while the aggregate amount for accident years prior to 2017 was an unfavorable $9 million. The unfavorable reserve development reflected more prudent reserving, as claims on average are remaining open longer than previously expected.
 
We believe the loss and loss expense reserves for our excess and surplus lines business are adequate. The amount of outstanding reserves for our excess and surplus lines operation can be seen in a table in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves. One indication of how long it takes for most of the outstanding reserves to be settled is to measure outstanding reserves by accident year at different points in time, using Item 8, Note 4 of the Consolidated Financial Statements. For example, for accident years 2013, 2012 and 2011, in aggregate, after subtracting cumulative paid amounts from incurred amounts at December 31, 2013, reserves for estimated unpaid losses, plus the portion of loss expenses known as ALAE, equaled $129 million. For those same accident years, at December 31, 2020, the reserve estimate for the remaining unpaid amount equaled $4 million. The inherent uncertainty in estimating reserves is discussed in Liquidity and Capital Resources, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves. Development trends by accident year are further discussed in Property Casualty Insurance Development of Estimated Reserves by Accident Year.
 
Excess and Surplus Lines Insurance Losses by Size
(Dollars in millions, net of reinsurance)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Current accident year losses greater than $5,000,000$ $— $— nmnm
Current accident year losses $1,000,000-$5,000,0008 14 75 
Large loss prior accident year reserve development — (100)nm
Total large losses incurred8 (11)125 
Losses incurred but not reported31 343 (13)
Other losses excluding catastrophe losses95 76 50 25 52 
Catastrophe losses5 150 
Total losses incurred$139 $94 $64 48 47 
Ratios as a percent of earned premiums:   Pt. ChangePt. Change
Current accident year losses greater than $5,000,0000.0 %0.0 %0.0 %0.0 0.0 
Current accident year losses $1,000,000-$5,000,0002.5 2.5 1.8 0.0 0.7 
Large loss prior accident year reserve development0.0 0.6 (0.1)(0.6)0.7 
Total large loss ratio2.5 3.1 1.7 (0.6)1.4 
Losses incurred but not reported9.5 2.4 3.6 7.1 (1.2)
Other losses excluding catastrophe losses29.3 27.7 21.1 1.6 6.6 
Catastrophe losses1.4 0.5 1.0 0.9 (0.5)
Total loss ratio42.7 %33.7 %27.4 %9.0 6.3 
 
In 2020, total large losses decreased by $1 million, net of reinsurance. The ratio for 2020 large losses as a percent of earned premiums decreased by 0.6 percentage points. That ratio for 2019 increased by 1.4 points, compared with 2018, as the amount of total large losses incurred more than doubled. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility 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 volatility in addition to general inflationary trends in loss costs.
 
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Excess and Surplus Lines Insurance Underwriting Expenses
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Commission expenses$58 $53 $45 9 18 
Other underwriting expenses36 32 23 13 39 
Total underwriting expenses$94 $85 $68 11 25 
Ratios as a percent of earned premiums:   Pt. ChangePt. Change
Commission expenses17.6 %18.9 %19.3 %(1.3)(0.4)
Other underwriting expenses11.1 11.5 9.8 (0.4)1.7 
Total underwriting expenses ratio28.7 %30.4 %29.1 %(1.7)1.3 
 
Excess and surplus lines commission expense as a percent of earned premiums for 2020 decreased compared with 2019, including a decrease in the ratio for profit-sharing commissions for agencies. The ratio for 2019 also decreased compared with 2018, largely due to a decrease in the ratio for profit-sharing commissions for agencies. The ratio for other underwriting expenses decreased in 2020, reflecting lower levels of business travel spending for associates, in addition to higher earned premiums and ongoing expense management efforts. In 2019, the ratio increased, primarily due to higher internal expense allocations that offset higher earned premiums and ongoing expense management efforts.
 
Excess and Surplus Lines Outlook
The excess and surplus lines market is expected to see the magnitude of rate increases rise slightly for risks that are casualty-driven. For property risks involving catastrophe exposures, premium rates in the foreseeable future are expected to be firm. New business opportunities, including those on larger accounts, are expected to increase as standard market insurance companies continue to re-underwrite business they previously took from the excess and surplus lines market and as larger excess and surplus lines companies re-underwrite their business with an emphasis on underwriting profitability. Firming is expected to continue for specific classes of business where loss costs are exceeding rates, such as habitational for property and general liability coverages, liquor liability for general liability coverages and hired and non-owned for general liability coverages.

Industry reports suggest that there are opportunities for profitability and growth through greater use of technology. Technology and data are also being used by excess and surplus lines insurance companies to identify new exposures in emerging businesses that need insurance protection or other value-added services.
 
Our strategy of providing superior service is expected to continue to grow our excess and surplus lines insurance segment and to achieve profitability despite challenging market conditions. We intend to keep carefully selecting and pricing risks, providing prompt delivery of insurance quotes and policies and giving outstanding claims and loss control service from local field representatives who also handle the standard lines business for their assigned agencies. These local representatives are supported by headquarters underwriters and claims managers who specialize in excess and surplus lines.

Cincinnati Financial Corporation - 2020 10-K - Page 86


Life Insurance Results
 
Overview – Three-Year Highlights
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Earned premiums$289 $270 $250 7 
Fee revenues2 (50)
Total revenues291 274 254 6 
Contract holders' benefits incurred297 286 267 4 
Investment interest credited to contract holders(102)(99)(96)(3)(3)
Underwriting expenses incurred85 86 75 (1)15 
Total benefits and expenses280 273 246 3 11 
Life insurance segment profit$11 $$nm(88)

The COVID-19 pandemic did not have a significant effect on our life insurance segment earned premiums, benefits or expenses in 2020. However, higher rates of unemployment during the pandemic could result in a significant decrease in 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 during 2020, and could continue to slow in the future, due to curtailed enrollment activity. It is also possible that we could experience higher than projected future death claims due to the pandemic.

Performance highlights for the life insurance segment also included:
Revenues – Earned premiums rose 7% for the year 2020, as shown in the table below that includes details by major line of business. Our largest life insurance product line, term life insurance, rose 6%. Net in-force policy face amounts rose 5% to $73.475 billion at year-end 2020 from $69.984 billion at year-end 2019 and $66.142 billion at year-end 2018.
Profitability – The life insurance segment frequently reports only a small profit or loss because most of its investment income is included in the investments segment results. We include only investment income credited to contract holders (interest assumed in life insurance policy reserve calculations) in life insurance segment results. The segment reported a profit of $11 million in 2020, $1 million in 2019 and $8 million in 2018. It has averaged an annual profit of $4 million over the past five years.

Earned premiums rose $19 million in 2020, primarily due to growth in our term life insurance business, as shown in the table below. Growth in 2019 was also primarily due to term life insurance.
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Term life insurance$197 $186 $172 6 
Universal life insurance44 39 37 13 
Other life insurance and annuity products48 45 41 7 10 
Net earned premiums$289 $270 $250 7 
 
We market term, whole and universal life products and fixed annuities. In addition, we offer term and whole life insurance to employees at their worksite. These products provide our property casualty agency force with excellent cross-serving opportunities for both commercial and personal accounts.
 
Over the past several years, we have worked to maintain a portfolio of simple, yet competitive, products. Our product development efforts emphasize death benefit protection and guarantees. Distribution expansion within our property casualty insurance agencies remains a high priority. Our 36 life field marketing representatives work in partnership with our property casualty field marketing representatives. Approximately 65% of our term and other life insurance product premiums were generated through our property casualty insurance agency relationships.
 
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Life insurance segment expenses consist principally of:
Contract holders’ benefits incurred, related to traditional life and interest-sensitive products, accounted for 77.7% of 2020 total benefits and expenses compared with 76.9% in 2019 and 78.1% in 2018. Total contract holders’ benefits increased as net death claims were higher in 2020, compared with 2019. Net death claims increased in 2020 and were below our mortality projections while remaining within our range of pricing expectations.
Underwriting expenses incurred, net of deferred acquisition costs, accounted for 22.3% of 2020 total benefits and expenses compared with 23.1% in 2019 and 21.9% in 2018. Expenses in 2020 decreased 1%, compared with 7% growth in earned premiums. Expenses in 2019 increased 15%, compared with 8% growth in earned premiums. In both 2020 and 2019, unlocking of interest rate and other actuarial assumptions decreased the amount of expenses deferred to future periods, increasing underwriting expenses.

Life insurance segment profitability depends largely on premium levels, the adequacy of product pricing, underwriting skill and operating efficiencies. This segment’s results include only investment interest credited to contract holders (interest assumed in life insurance policy reserve calculations). The remaining investment income is reported in the investments segment results. The life investment portfolio is managed to earn target spreads between earned investment rates on general account assets and rates credited to policyholders. We consider the value of assets under management and investment income for the life investment portfolio as key performance indicators for the life insurance segment. We seek to maintain a competitive advantage with respect to benefits paid and reserve increases by consistently achieving better than average claims experience due to skilled underwriting.

We recognize that assets under management, capital appreciation and investment income are integral to evaluation of 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, our life insurance subsidiary reported net income of $32 million in 2020, compared with $39 million in 2019 and $48 million in 2018. The life insurance subsidiary portfolio had after-tax net investment losses of $21 million in 2020, $4 million in 2019 and $4 million in 2018. Investment gains and losses are discussed under Investments Results. We exclude most of our life insurance company investment income from investments segment results.

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Life Insurance Outlook
The pandemic put a national spotlight on the importance of life insurance. Millennials and Generation Z are now more inclined to consider our product than ever before, and we are convinced that while they may prefer to shop on their own, they want to talk to a professional agent before they buy. We are implementing new digital technologies to help our agents acquire and process new business and are confident that we have plenty of room to grow.

We remain bullish on the voluntary life insurance market as well. While the pandemic made it difficult to do traditional in-person enrollments in 2020, the desire for these products increased, both with employers and their employees. As pandemic-related restrictions begin to ease and new digital enrollment options become more broadly accepted, we expect to see strong growth in this line.

The low interest rate environment continues to persist. We feel comfortable that our focus on term insurance insulates us, to some degree, from the challenges that low rates bring.
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Investments Results
 
Overview – Three-Year Highlights
Investments Results
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Total investment income, net of expenses$670 $646 $619 4 
Investment interest credited to contract holders(102)(99)(96)(3)(3)
Investment gains and losses, net865 1,650 (402)(48)nm
Investments profit, pretax$1,433 $2,197 $121 (35)nm
 
During 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 the last three quarters of 2020, valuations increased for a significant portion of our fixed-maturity and equity portfolios.

The investments segment contributes investment income and investments gains and losses to results of operations. Investment income is generally our primary source of pretax and after-tax profits.
Investment income – Pretax investment income grew $24 million, or 4%, in 2020, due to increases from dividends and interest income. Dividend income grew 9%, reflecting rising dividend rates and net purchases of equity securities from available funds. Interest income grew 2% in 2020, compared with 2019, as net purchases of fixed-maturity securities offset the continuing effects on bond yields of the low interest rate environment. Pretax investment income rose 4% in 2019, primarily due to an increase in dividend income. Average yields in the investment income table below 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.
Investment gains and losses – We reported an investment gain for both 2020 and 2019, primarily due to favorable changes in fair values of equity securities even though we continue to hold the securities or as otherwise required by GAAP. For 2018, we reported an investment loss, primarily due to unfavorable changes in fair values of equity securities we continued to hold.

We believe it is useful to analyze our overall investment performance by using total investment return over several years. Total investment return considers changes in unrealized gains and losses that are not included in net income, in addition to net investment income and investment gains and losses that are included in net income. Changes in unrealized gains and losses shown in the table below include other invested assets. Considering total investment gains and losses over several years helps evaluate performance since gains and losses may experience typical variability during shorter periods of time.
 
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The table below shows total return based on assumptions that simplify cash flow timing that is commonly used in total return measures. This simplified calculation uses data shown in our consolidated financial statements or notes to those statements. Added to invested asset amounts from our consolidated balance sheets are 50% of annual amounts pertaining to invested asset categories included in net cash used in investing activities from our consolidated statements of cash flows. The cash flow amounts are reduced by net gains from investment portfolio securities sales or called bonds, with the net result reduced by 50% to represent estimated new cash invested during each respective year. All new cash is assumed to be invested at the midpoint of the year.
 
Total investment return of 9.8% in 2020 was 6.8 percentage points less than in 2019. Both the 2020 and 2019 contributions from the investment income component was enhanced by the net favorable effect of the investment gains and losses components. Comparing contributions for 2020 with 2019, investment income rose $24 million, investment gains were $785 million less favorable and the invested assets change in unrealized gains and losses decreased by $108 million. The base component of the return calculation, annual average invested assets, was up 17% in 2020. For 2019 compared with 2018, total investment return increased by 17.3 percentage points, primarily due to a net favorable effect of the investment gains and losses compared with an unfavorable effect in 2018. The base component of the return calculation, annual average invested assets, decreased 1% in 2019.
 
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Invested assets beginning balance:     
Fixed maturities$11,698 $10,689 $10,699 9 
Equity securities7,752 5,920 6,249 31 (5)
Other invested assets296 123 103 141 19 
Invested assets beginning balance19,746 16,732 17,051 18 (2)
Average acquisitions (dispositions), net309 343 215 (10)60 
Annual average invested assets$20,055 $17,075 $17,266 17 (1)
Total investment return:     
Investment income, net of expenses$670 $646 $619 4 
Investment gains and losses, net865 1,650 (402)(48)nm
Total invested assets change in unrealized gains and losses436 544 (339)(20)nm
Total$1,971 $2,840 $(122)(31)nm
Total return on invested assets, pretax9.8 %16.6 %(0.7)%  
 
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Investment Income
The primary drivers of investment income are highlighted below, followed by additional details of our investment results.
Interest income increased by $9 million, or 2%, in 2020, compared with 2019. The average fixed-maturity pretax yield declined by approximately 4 basis points but was offset by a larger average fixed-maturity portfolio that rose 2% on an amortized cost basis. Interest income in 2019 increased by $1 million, compared with 2018, when that yield declined by approximately 15 basis points while the portfolio rose 4% on an amortized cost basis.
Dividend income rose $19 million, or 9%, in 2020, after rising 11% in 2019. Increases in dividend payment rates for most of the holdings in our common stock portfolio during both 2020 and 2019 drove the increases in dividend income. An increase in funds invested in that portfolio during both 2020 and 2019 also favorably affected dividend income.

(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Investment income:     
Interest$455 $446 $445 2 
Dividends220 201 181 9 11 
Other8 12 (33)140 
Less investment expenses13 13 12 0 
Investment income, pretax670 646 619 4 
Less income taxes104 101 95 3 
Total investment income, after-tax$566 $545 $524 4 
Investment returns:
Average invested assets plus cash and cash equivalents$20,670 $18,697 $17,397   
Average yield pretax3.24 %3.46 %3.56 %  
Average yield after-tax2.74 2.91 3.01   
Effective tax rate15.5 15.6 15.4 
Fixed-maturity returns:
Average amortized cost$11,210 $10,876 $10,479   
Average yield pretax4.06 %4.10 %4.25 %  
Average yield after-tax3.39 3.42 3.55   
Effective tax rate16.6 16.6 16.4 
 
In 2020, we continued to invest available cash flow in both fixed income and equity securities in a manner that we believe balances current income needs with longer-term invested asset growth goals. 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 position our portfolio with consideration to 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.
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The table below summarizes pretax yield to amortized costs excluding any book value adjustments due to impairment for bonds in our fixed-maturity portfolio by various maturity periods.
At December 31, 2020% YieldPrincipal redemptions
Fixed-maturity yield profile:
Expected to mature during 20214.37 %$835 
Expected to mature during 20223.93 935 
Expected to mature during 20234.26 969 
Average yield and total expected redemptions from 2021 through 20234.18 $2,739 

The average pretax yield of 3.97% for fixed-maturity securities acquired during 2020, shown in the table below, was lower than the 4.12% average yield-to-amortized cost of the fixed-maturity securities portfolio at the end of 2020.
Years ended December 31,
20202019
Average pretax yield-to-amortized cost on new fixed maturities:
Acquired taxable fixed maturities4.23 %4.31 %
Acquired tax-exempt fixed maturities2.71 3.31 
Average total fixed maturities acquired3.97 4.14 

We discussed our portfolio strategies in Item 1, Investments Segment. We discuss risks related to our investment income and our fixed-maturity and equity investment portfolios in Item 7a, Quantitative and Qualitative Disclosures About Market Risk.
 
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Total Investment Gains and Losses
Investment gains and losses are recognized on the sales of investments, for certain changes in fair values of securities even though we continue to hold the securities or as otherwise required by GAAP. New accounting requirements adopted in 2018 resulted in reporting, through net income, the change in fair value for equity securities still held, as disclosed in Note 1, Summary of Significant Accounting Policies. Total investment gains and losses included $841 million of gains in 2020, from the recognition of fair value changes of equity securities still held that prior to 2018 would have been reported in other comprehensive income (OCI) instead of net income. Change in unrealized gains or losses for fixed-maturity securities are included as a component of OCI. Accounting requirements for the allowance for credit losses and other-than-temporary impairment (OTTI) charges for the fixed-maturity portfolio are disclosed in Item 8, Note 1, Summary of Significant Accounting Policies. The factors we consider when evaluating impairments are also discussed in Critical Accounting Estimates, Asset Impairment.
The timing of gains or losses from sales can have a material effect on results in any given period. However, such gains or losses usually have little, if any, effect on total shareholders’ equity because most equity and fixed-maturity investments are carried at fair value.
 
As appropriate, we buy, hold or sell both fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We generally purchase fixed-maturity securities with the intention to hold until maturity. If they no longer meet our investment criteria, they are divested. Sales of fixed-maturity securities are usually due to a change in credit fundamentals. Pretax total investment gains in 2020 and 2019 were largely due to favorable changes in fair values of equity securities even though we continue to hold the securities. In 2018, total investment losses reflected unfavorable changes in fair values of fixed-maturity and equity securities we continued to hold. Additional information about investment gains or losses is included in Item 8, Note 2 of the Consolidated Financial Statements.

The table below summarizes total investment gains and losses, before taxes.
(Dollars in millions)Years ended December 31,
 202020192018
Investment gains and losses
Equity securities:
Investment gains and losses on securities sold, net$79 $26 $
Unrealized gains and losses on securities still held, net841 1,626 (404)
Subtotal920 1,652 (395)
Fixed-maturity securities:
   Gross realized gains16 13 12 
   Gross realized losses(3)(3)(2)
Write-down of impaired securities(78)(9)(5)
Subtotal(65)
Other10 (3)(12)
Total investment gains and losses reported in net income$865 $1,650 $(402)
Change in unrealized investment gains and losses reported in OCI
Fixed-maturity securities436 544 (339)
 Total$1,301 $2,194 $(741)
 
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Write-downs of impaired securities or OTTI charges from the investment portfolio by the asset classes we described in Item 1, Our Segments, Investments Segment, are summarized below:
(Dollars in millions)Years ended December 31,
 202020192018
Taxable fixed maturities:   
Impairment amount$77 $$
New amortized cost$78 $20 $
Percent to total amortized cost owned1 %— %— %
Number of impaired securities written down13 
Percent to number of securities owned2 %— %— %
Tax-exempt fixed maturities:   
Impairment amount$1 $— $— 
New amortized cost$1 $— $— 
Percent to total amortized cost owned %— %— %
Number of impaired securities written down1 — — 
Percent to number of securities owned %— %— %
Totals:   
Impairment amount$78 $$
New amortized cost$79 $20 $
Percent to total amortized cost owned1 %— %— %
Number of impaired securities written down14 
Percent to number of securities owned1 %— %— %
 
Write-downs of impaired securities or OTTI charges from the investment portfolio by industry are summarized as follows:
(Dollars in millions)Years ended December 31,
 202020192018
Fixed maturities:   
Energy$62 $$
Real estate13 — 
Consumer goods1 — — 
Municipal1 — — 
Technology & Electronics1 — — 
Total fixed maturities$78 $$

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Investments Outlook     
After a rapid and significant drop in securities prices during the early phase of the pandemic, both the bond and equity markets rallied through the remainder of 2020. Historically tight corporate credit spreads, along with a likely continuation of accommodating interest rate policies, will challenge new money rates and investment income growth in the near term.

We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth. In 2021, we expect to continue to allocate a portion of cash available for investment to equity securities, taking into consideration corporate liquidity and income requirements, as well as insurance department regulations and rating agency comments. We discuss our portfolio strategies in Item 1, Our Segments, Investments Segment.

An interruption or reversal of the market recovery that occurred during the second half of 2020 could have detrimental effects on securities prices and potentially lead to increases in the allowance for credit losses or write-downs of impaired securities to fair value. Our asset impairment committee continues to monitor the investment portfolio. Our asset impairment policy is described in Critical Accounting Estimates, Asset Impairment. 

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Other
Total revenues in 2020 and 2019 for our Other operations increased, compared with the respective prior-year periods, primarily due to earned premiums of Cincinnati Re and Cincinnati Global. Other also includes noninvestment operations of the parent company and its commercial leasing and financial services subsidiary, CFC Investment Company. Total expenses for Other also increased in 2020 and 2019, primarily due to losses and loss expenses and underwriting expenses from Cincinnati Re and Cincinnati Global.

Other loss in the table below represents losses before income taxes. For each year shown, Other loss was largely driven by interest expense from debt of the parent company. Net results for the combination of Cincinnati Re and Cincinnati Global were an underwriting loss of approximately $26 million in 2020 and an underwriting profit of approximately $39 million in 2019. The underwriting loss in 2020 included $31 million of pandemic-related incurred losses and expenses, as discussed in Corporate Financial Highlights of Management’s Discussion and Analysis.
(Dollars in millions)Years ended December 31,2020-20192019-2018
 202020192018Change %Change %
Interest and fees on loans and leases$6 $$20 25 
Earned premiums427 333 132 28 152 
Other revenues4 0 300 
Total revenues437 342 137 28 150 
Interest expense54 53 53 2 
Loss and loss expenses325 195 98 67 99 
Underwriting expenses128 99 42 29 136 
Operating expenses20 23 16 (13)44 
Total expenses527 370 209 42 77 
Other loss$(90)$(28)$(72)(221)61 
 
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Taxes
We had a $283 million income tax expense in 2020, compared with $475 million in 2019 and an income tax benefit of $36 million in 2018. Our corporate effective tax rate for 2020 was 18.9% compared with 19.2% in 2019 and negative 14.3% in 2018.
 
The changes in our effective tax rate between periods were due to changes in our net investment gains and losses, changes in our underwriting income, as well as changes in investment income. As a result of adoption of ASU 2016-01, effective January 1, 2018, changes in our effective tax rate were impacted by large net investment losses, due to the recognition of fair value changes of equity securities still held, included in 2018 income and large investment gains included in both 2019 and 2020 income. In addition, our change in the 2018 effective tax rate included a reduction by 19.9% as a result of Internal Revenue Service approved changes to our tax accounting methods, primarily related to the valuation of our tax basis unpaid losses.

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 Item 1, Our Segments, Fixed-Maturity Security Investments, for further discussion on municipal bond purchases in our fixed-maturity investment portfolio.

For tax years after 2017, for our property casualty insurance subsidiaries, approximately 75% of interest from tax-advantaged, fixed-maturity investments and approximately 40% of dividends from qualified equities are exempt from federal tax after applying proration. For our noninsurance companies, the dividend received deduction exempts 50% of dividends from qualified equities. Our life insurance company does not own tax-advantaged, fixed-maturity investments or equities subject to the dividend received deduction.

Our effective tax rate reconciliation is found in Item 8, Note 11 of the Consolidated Financial Statements.

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Liquidity and Capital Resources
We seek to maintain prudent levels of liquidity and financial strength for the protection of our policyholders, creditors and shareholders. We manage liquidity at two levels to meet the short- and long-term cash requirements of business obligations and growth needs. The first is the liquidity of the parent company. The second is the liquidity of our lead insurance subsidiary. Management of liquidity at both levels is essential because each has different funding needs and sources, and each is subject to certain regulatory guidelines and requirements.

The COVID-19 pandemic and related economic effects slowed the rate of our premium growth in 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.

The pandemic did not have a significant effect on our cash flows during 2020. 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.
 
Parent Company Liquidity
At December 31, 2020, the parent company had $3.771 billion in cash and marketable securities, providing strong liquidity to fund cash outflows, as needed. The payment of dividends to shareholders is largely based upon receiving subsidiary dividends. Alternatively, we could sell investments or use our line of credit to support the dividend payment.

The parent company’s primary sources of cash inflows are dividends from our lead insurance subsidiary, investment income and sale proceeds from investments. The parent company’s cash outflows are primarily interest and principal payments on long- and short-term debt, dividends to shareholders, common stock repurchases, deposits at Lloyd's and general operating expenses. The table below shows a summary, by the direct cash flow method, of the major sources and uses of cash flow of the parent company.
 
(Dollars in millions)Years ended December 31,
 202020192018
Sources of liquidity:   
Insurance subsidiary dividends received$550 $625 $500 
Investment income received81 75 65 
Proceeds from stock options exercised7 11 
Uses of liquidity:   
Shareholders' dividend payments$375 $355 $336 
Share repurchases261 67 125 
Debt interest payments54 52 52 
Deposits at Lloyd's, net42 67 — 
Pension contribution — 15 
 
We expect 2021 parent company sources of cash flow to be similar to 2020. Use of liquidity for share repurchases are discretionary depending on cash availability and capital management decisions. Cincinnati Global is required to maintain certain capital funding requirements with Lloyd’s which the parent company may deposit on their behalf. These funding requirements may fluctuate based on the profitability of Cincinnati Global and syndicate solvency capital requirements as set by Lloyd's. Other than share repurchases and funding at Lloyd's, the majority of expenditures for the parent company have been consistent during the last three years, and we expect future expenditures to remain stable.

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Insurance Subsidiary Liquidity
The parent company’s lead insurance subsidiary largely represents the operations of the property casualty segments. The primary sources of cash inflows are collection of premiums, investment income, maturity of fixed-income securities and sale proceeds from investments. Property casualty insurance premiums generally are received before losses are paid under the policies purchased with those premiums. Cash outflows are primarily loss and loss expenses, commissions, salaries, taxes, operating expenses and investment purchases. Over the three-year period ended December 31, 2020, premium receipts and investment income have been more than sufficient to pay claims and operating expenses. Excess cash flows were partially used to pay dividends to the parent company. We are not aware of any known trends that would materially change historical cash flow results, other than fluctuations in catastrophe claims and other large losses, either individually or in aggregate.

The table below shows a summary of operating cash flow for property casualty insurance (direct method). Historically, annual variation in operating cash flow has been largely related to changes in amounts of catastrophe losses.
(Dollars in millions)Years ended December 31,
 202020192018
Premiums collected$5,828 $5,495 $5,028 
Loss and loss expenses paid(3,183)(3,260)(2,847)
Commissions and other underwriting expenses paid(1,785)(1,639)(1,549)
Cash flow from underwriting860 596 632 
Investment income received456 451 428 
Cash flow from operations$1,316 $1,047 $1,060 
 
Other Sources of Liquidity
Cash in excess of operating requirements is invested in fixed-maturity and equity securities. Cash generated from investment income provides an important investment contribution to cash flow and liquidity. The sale of investments could provide an additional source of liquidity at either the parent company or insurance subsidiary level, if required. In addition to possible sales of investments, proceeds of call or maturities of fixed-maturity securities also can provide liquidity. During the five-year period beginning in 2021, fair value of $4.286 billion, or 34.8%, of our fixed-maturity portfolio is scheduled to mature. At December 31, 2020, we had $8.541 billion of common stock securities, with $3.686 billion, or 43.2%, held by the parent company.
 
Financial resources of the parent company also could be made available to our insurance subsidiaries, if circumstances required it. This flexibility would include our ability to access the capital markets and short-term bank borrowings. We generally have minimized our reliance on debt financing, although we may use the line of credit to fund short-term cash needs.
 
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Long-Term Debt
We provide details of our three long-term notes in Item 8, Note 8 of the Consolidated Financial Statements. None of the notes are encumbered by rating triggers. The total principal amount of our long-term debt at December 31, 2020, was $793 million and included:
$28 million aggregate principal amount of 6.900% senior debentures due 2028.
$391 million aggregate principal amount of 6.920% senior debentures due 2028.
$374 million aggregate principal amount of 6.125% senior debentures due 2034.

The company’s senior debt is rated investment grade by four independent rating agencies. None of the rating agencies made changes to our debt ratings in 2020, except for the previously disclosed action by A.M. Best, which upgraded our debt rating from a- to a on January 30, 2020. At February 24, 2021, our debt ratings from the other rating agencies were: A- from Fitch, A3 from Moody’s and BBB+ from S&P.
 
Note Payable
At December 31, 2020, we had a $300 million line of credit with commercial banks, with $54 million borrowed. The amount borrowed was $39 million at December 31, 2019, and during 2020 we borrowed $90 million of which $75 million was used to repurchase shares during the first quarter of 2020. The $75 million was repaid on December 31, 2020. That unsecured revolving line of credit has an accordion feature giving us the option to double the $300 million amount, under the same terms and conditions. Terms and conditions of the agreement include a debt-to-total capital maximum of 35% and the agreement has no net worth covenant. It was due to expire on February 4, 2025, with the option of a one-year extension. On December 11, 2020, we exercised the option to extend the term of the line of credit one additional year to February 4, 2026.

At year-end 2020, we were in compliance with all covenants under the credit agreement and believe we will remain in compliance. The credit agreement provides alternative interest charges based on the type of borrowing and our debt rating. The interest rate charged is adjusted LIBOR plus an applicable margin. The agreement contains successor LIBOR rate language, which will require an amendment to reflect the new replacement rate. We could be impacted to the extent the replacement rate differs materially from the LIBOR rate.

Capital Resources
Capital resources consisting of shareholders’ equity and total debt represent our overall financial strength to support current obligations and growth in our insurance businesses. At December 31, 2020, we had total capital of $11.631 billion. Shareholders’ equity was $10.789 billion, an increase of $925 million, or 9%, from the prior year. Our total debt was $842 million, up $15 million from a year ago. We seek to maintain a solid financial position and provide capital flexibility by keeping our ratio of debt to total capital moderate. At year-end 2020, the ratio was 7.2%, compared with 7.7% at year-end 2019.

At times we enter into letter of credit agreements to support our Cincinnati Re and Cincinnati Global operations. We have an unsecured letter of credit agreement to provide a portion of the capital needed to support Cincinnati Global's obligations at Lloyd's. The amount of this unsecured letter of credit agreement was $94 million with no amounts drawn at December 31, 2020.
 
At the discretion of the board of directors, the company can return capital directly to shareholders as discussed below.
Dividends to shareholders – The ability of our company to continue paying cash dividends is subject to factors the board of directors deems relevant. While the board and management believe there is merit to sustaining the company’s long record of dividend increases, our first priority is the company’s financial strength. Over the past 10 years, the company has paid an average of 65% of net income as dividends. Through 2020, the board had increased our cash dividend for 60 consecutive years. The board's decision in January 2021 to increase the dividend demonstrated confidence in the company’s strong capital, liquidity, financial flexibility and initiatives to grow earnings.
Common stock repurchase – Generally, our board believes that share repurchases can help fulfill our commitment to enhancing shareholder value. Consequently, the board has authorized the repurchase of outstanding shares, giving management discretion to purchase shares at reasonable prices in light of circumstances at the time of purchase. Our approach has been to hold capital adequate to support future growth of our insurance operations and repurchase shares at management's discretion. Repurchases are intended to offset the issuance of shares
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through equity compensation plans, primarily due to vesting of service-based restricted stock units of equity awards granted in the past. The amount of future repurchases may be more, or less, than the past, depending on circumstances and discretion exercised by management. Our corporate Code of Conduct restricts repurchases during certain time periods. The details of the repurchase authorizations and activity are described in Item 5, Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Obligations
We pay obligations to customers, suppliers and associates in the normal course of our business operations. Some are contractual obligations that define the amount, circumstances and/or timing of payments. We have other commitments for business expenditures; however, the amount, circumstances and/or timing of our other commitments are not dictated by contractual arrangements.
 
Contractual Obligations
At December 31, 2020, we estimated our future contractual obligations as follows:
(Dollars in millions)YearYearsYearsThere- 
Payment due by period20212022-20232024-2025afterTotal
Gross property casualty loss and loss expense payments$2,368 $2,425 $899 $985 $6,677 
Gross life policyholder obligations93 132 200 5,389 5,814 
Interest on long-term debt52 104 104 267 527 
Long-term debt— — — 793 793 
Short-term debt54 — — — 54 
Profit-sharing commissions142 — — — 142 
Finance lease obligations15 22 10 49 
Operating lease obligations11 
Other liabilities117 14 143 
Total$2,843 $2,701 $1,223 $7,443 $14,210 
 
Other Commitments
At December 31, 2020, we believe our most significant other commitments were:
Commissions – We expect commission payments to generally track with written premiums.
Other operating expenses – Many of our operating expenses are not contractual obligations but reflect the ongoing expenses of our business.
Other invested assets – We expect to fund approximately $164 million for our private equity and real estate investments over the next several years.
Funds at Lloyd's – From time to time, we may be required to meet certain cash funding requirements on behalf of Cincinnati Global. During 2020, the parent company deposited a net $42 million with Lloyd's to meet these funding requirements.

Liquidity and Capital Resources Outlook
At December 31, 2020, we had $900 million in cash and cash equivalents. During 2021, our lead insurance subsidiary may pay $583 million in dividends to our parent company without regulatory approval. That strong liquidity and our consistent cash flows give us the flexibility to meet current obligations and commitments while building value by prudently investing where we see potential for both current income and long-term return. Our cash and cash equivalents provide adequate financial cushion when short-term operating results do not meet our objectives.

A long-term perspective governs our liquidity and capital resources decisions, with the goal of benefiting our policyholders, agents, shareholders and associates over time. Our underwriting philosophy and initiatives can drive performance to achieve our underwriting profitability target of a GAAP combined ratio over any five-year
Cincinnati Financial Corporation - 2020 10-K - Page 102


period that consistently averages within the range of 95% to 100%. Our GAAP combined ratio averaged 96.1% over the five-year period 2016 through 2020, resulting in strong underwriting profits.

In any year, we consider the most likely source of pressure on liquidity would be an unusually high level of catastrophe loss payments within a short period of time. There could be additional obligations for our insurance operations due to increasing severity or frequency of noncatastrophe claims. To address the risk of unusually large insurance loss obligations, including catastrophe events, we maintain property casualty reinsurance contracts with highly rated reinsurers, as discussed under 2021 Reinsurance Ceded Programs. We also monitor the financial condition of our reinsurers because their insolvency could jeopardize a portion of our $517 million reinsurance recoverable asset at December 31, 2020. Parent-company liquidity could also be constrained by Ohio regulatory requirements that restrict the dividends insurance subsidiaries can pay.
 
Economic weakness also has the potential to affect our liquidity and capital resources in a number of different ways, including delinquent payments from agencies, defaults on interest payments by fixed-maturity holdings in our portfolio, dividend reductions by holdings in our equity portfolio or declines in the market value of holdings in our portfolio. In an effort to support insurance consumers during this pandemic, 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. Such actions, if extended or enacted again, may result in delayed premium receipts, disrupting cash flows and increasing credit risk from policyholders unable to make timely premium payments. Cash flows and gross premium receipts may also be affected by mid-term adjustments to exposures on which premium calculations are based to reflect the economic impact of the COVID-19 crisis on insureds’ business operations.

LIBOR Discontinuation
We have identified our population of contracts that contain a LIBOR reference and determined our exposure to be minimal. Our identification is primarily related to our line of credit, an unsecured letter of credit agreement to provide a portion of the capital needed to support obligations at Lloyd's, investments in floating rate securities and late fee provisions. We will continue to work with counterparties to determine alternative rates for each contract identified.
 
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 applicable SEC 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.
 
Property Casualty Loss and Loss Expense Obligations and Reserves
Our estimate of future gross property casualty loss and loss expense payments of $6.677 billion is lower than loss and loss expense reserves of $6.746 billion reported on our balance sheet at December 31, 2020. The $69 million difference is due to certain life and health loss reserves. Reserving practices are discussed in Critical Accounting Estimates, 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 for other parts of our property casualty insurance operations, the following table details gross reserves among case, IBNR and loss expense reserves, net of salvage and subrogation. The $589 million increase in total gross reserves was primarily due to a $451 million increase in IBNR loss reserves and a $78 million increase in loss expense reserves. The increase in total gross reserves included $133 million for our commercial casualty line of business, $111 million for commercial property, $95 for excess and surplus lines and $113 million for Cincinnati Re.
 
Cincinnati Financial Corporation - 2020 10-K - Page 103


Property Casualty Gross Loss and Loss Expense Reserves
(Dollars in millions)Loss reservesLoss expense reservesTotal gross reserves 
 Case reservesIBNR reservesPercent of total
At December 31, 2020
Commercial lines insurance:     
Commercial casualty$955 $764 $653 $2,372 35.5 %
Commercial property338 127 69 534 8.0 
Commercial auto391 209 141 741 11.1 
Workers' compensation402 534 89 1,025 15.4 
Other commercial92 13 104 209 3.1 
Subtotal2,178 1,647 1,056 4,881 73.1 
Personal lines insurance:     
Personal auto205 56 68 329 4.9 
Homeowner166 47 41 254 3.8 
Other personal61 90 5 156 2.3 
Subtotal432 193 114 739 11.0 
Excess and surplus lines190 133 123 446 6.7 
Cincinnati Re77 287 2 366 5.5 
Cincinnati Global147 95 3 245 3.7 
Total$3,024 $2,355 $1,298 $6,677 100.0 %
At December 31, 2019     
Commercial lines insurance:     
Commercial casualty$937 $680 $622 $2,239 36.8 %
Commercial property339 20 64 423 7.0 
Commercial auto409 157 143 709 11.6 
Workers' compensation404 516 93 1,013 16.6 
Other commercial108 70 185 3.0 
Subtotal2,197 1,380 992 4,569 75.0 
Personal lines insurance:     
Personal auto233 46 78 357 5.9 
Homeowner134 32 41 207 3.4 
Other personal49 69 123 2.0 
Subtotal416