Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
34
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|
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(Dollars are per share)
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|
Three months ended March 31,
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|
2019
|
|
2018
|
|
Value creation ratio:
|
|
|
|
|
|
|
|
End of period book value*
|
|
$
|
52.88
|
|
|
$
|
48.42
|
|
|
Less beginning of period book value
|
|
48.10
|
|
|
50.29
|
|
|
Change in book value
|
|
4.78
|
|
|
(1.87
|
)
|
|
Dividend declared to shareholders
|
|
0.56
|
|
|
0.53
|
|
|
Total value creation
|
|
$
|
5.34
|
|
|
$
|
(1.34
|
)
|
|
|
|
|
|
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|
Value creation ratio from change in book value**
|
|
9.9
|
%
|
|
(3.7
|
)%
|
|
Value creation ratio from dividends declared to shareholders***
|
|
1.2
|
|
|
1.0
|
|
|
Value creation ratio
|
|
11.1
|
%
|
|
(2.7
|
)%
|
|
|
|
|
|
|
|
* Book value per share is calculated by dividing end of period total shareholders' equity by end of period shares outstanding
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** Change in book value divided by the beginning of period book value
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*** Dividend declared to shareholders divided by beginning of period book value
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DRIVERS OF LONG-TERM VALUE CREATION
Operating through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on 2018 net written premiums for approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies as discussed in our 2018 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. At March 31, 2019, we actively marketed through agencies located in 43 states. We maintain a long-term perspective that guides us in addressing immediate challenges or opportunities while focusing on the major decisions that best position our company for success through all market cycles.
To measure our long-term progress in creating shareholder value, our value creation ratio is our primary financial performance target. As discussed in our 2018 Annual Report on Form 10-K, Item 7, Executive Summary, Page 49, management believes this measure is a meaningful indicator of our long-term progress in creating shareholder value and has
three primary performance drivers:
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•
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Premium growth – We believe our agency relationships and initiatives can lead to a property casualty written premium growth rate over any five-year period that exceeds the industry average. For the first three months of 2019, our consolidated property casualty net written premium year-over-year growth was 10%. As of February 2019, A.M. Best projected the industry's full-year 2019 written premium growth at approximately 4%. For the five-year period 2014 through 2018, our growth rate slightly exceeded that of the industry. The industry's growth rate excludes its mortgage and financial guaranty lines of business.
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•
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Combined ratio – We believe our underwriting philosophy and initiatives can generate a GAAP combined ratio over any five-year period that is consistently within the range of 95% to 100%. For the first three months of 2019, our GAAP combined ratio was 93.0% and our statutory combined ratio was 91.5%, both including 5.6 percentage points of current accident year catastrophe losses mostly offset by 5.3 percentage points of favorable loss reserve development on prior accident years. As of February 2019, A.M. Best projected the industry's full-year 2019 statutory combined ratio at approximately 101%, including approximately 5 percentage points of catastrophe losses and a favorable effect of approximately 1.5 percentage points of loss reserve development on prior accident years. The industry's ratio again excludes its mortgage and financial guaranty lines of business.
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•
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Investment contribution – We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year return of the Standard & Poor’s 500 Index. For the first three months of 2019, pretax investment income was $157 million, up 5% compared with the same period in 2018. We believe our investment portfolio mix provides an appropriate balance of income stability and growth with capital appreciation potential.
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Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
35
Highlights of Our Strategy and Supporting Initiatives
Management has worked to identify a strategy that can lead to long-term success, with concurrence by the board of directors. Our strategy is intended to position us to compete successfully in the markets we have targeted while appropriately managing risk. Further description of our long-term, proven strategy can be found in our 2018 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. We believe successful implementation of initiatives that support our strategy will help us better serve our agent customers and reduce volatility in our financial results while we also grow earnings and book value over the long term, successfully navigating challenging economic, market or industry pricing cycles.
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•
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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.
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We continue to enhance our property casualty underwriting expertise and to effectively and efficiently underwrite individual policies and process transactions. Ongoing initiatives supporting this work include expanding our pricing and segmentation capabilities through experience and use of predictive analytics and additional data. Our segmentation efforts emphasize identification and retention of insurance policies we believe have relatively stronger pricing, while seeking more aggressive renewal terms and conditions on policies we believe have relatively weaker pricing. In 2019, we continue to improve underwriting and rate adequacy for our commercial auto and personal auto lines of business. Our commercial auto policies that renewed during the first three months of 2019 experienced an estimated average price increase at percentages in the high-single-digit range, and our personal auto policies that renewed during that period also averaged an estimated price increase at percentages in the high-single-digit range.
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•
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Drive premium growth – Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Premium growth initiatives also include expansion of Cincinnati Re
SM
, our reinsurance assumed operation, and successful integration of MSP. Diversified growth also may reduce variability of losses from weather-related catastrophes.
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We continue to appoint new agencies to develop additional points of distribution. In 2019, we are planning approximately 100 appointments of independent agencies that offer most or all of our property casualty insurance products. During the first three months of 2019, we appointed 22 new agencies that meet that criteria.
We also plan to appoint additional agencies that focus on high net worth personal lines clients. In 2019, we are targeting the appointment of approximately 80 agencies that market only personal lines products for us. During the first three months of 2019, we appointed 24 new agencies that meet that criteria.
As of March 31, 2019, a total of 1,761 agency relationships market our property casualty insurance products from 2,376 reporting locations. The totals do not include Lloyd's brokers or coverholders that source business for MSP.
We also continue to grow premiums through the disciplined expansion of Cincinnati Re and the acquisition of MSP. During the first three months of 2019, Cincinnati Re contributed $38 million of growth in consolidated property casualty insurance net written premiums while MSP contributed $21 million. We also believe MSP over time will provide opportunities to support business produced by our independent agencies in new geographies and lines of business.
Financial Strength
An important part of our long-term strategy is financial strength, which is described in our 2018 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Financial Strength, Page 8. One aspect of our financial strength is prudent use of reinsurance ceded to help manage financial performance variability due to catastrophe loss experience. A description of how we use reinsurance ceded is included in our 2018 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, 2019 Reinsurance Ceded Programs, Page 105. Another aspect of our financial strength is our investment portfolio, which remains well-diversified as discussed in this quarterly report in Item 3, Quantitative and Qualitative Disclosures About Market Risk. Our strong parent-company liquidity and financial strength increase our flexibility to maintain a cash dividend through all periods and to continue to invest in and expand our insurance operations.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
36
At March 31, 2019, we held $2.751 billion of our cash and invested assets at the parent-company level, of which $2.477 billion, or 90.0%, was invested in common stocks, and $166 million, or 6.0%, was cash or cash equivalents. Our debt-to-total-capital ratio was 8.7% at March 31, 2019. Another important indicator of financial strength is our ratio of property casualty net written premiums to statutory surplus, which was 1.0-to-1 for the 12 months ended March 31, 2019, matching year-end 2018.
Financial strength ratings assigned to us by independent rating firms also are important. In addition to rating our parent company’s senior debt, four firms award insurer financial strength ratings to one or more of our insurance subsidiary companies based on their quantitative and qualitative analyses. These ratings primarily assess an insurer’s ability to meet financial obligations to policyholders and do not necessarily address all of the matters that may be important to investors. Ratings are under continuous review and subject to change or withdrawal at any time by the rating agency. Each rating should be evaluated independently of any other rating; please see each rating agency's website for its most recent report on our ratings.
At April 23, 2019, our insurance subsidiaries continued to be highly rated.
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Insurer Financial Strength Ratings
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Rating
agency
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Standard market property casualty insurance subsidiaries
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Life insurance
subsidiary
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Excess and surplus lines insurance subsidiary
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Outlook
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Rating
tier
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Rating
tier
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Rating
tier
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A.M. Best Co.
ambest.com
|
A+
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Superior
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2 of 16
|
A
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Excellent
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3 of 16
|
A+
|
Superior
|
2 of 16
|
Stable/ Positive/ Stable
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|
Fitch Ratings
fitchratings.com
|
A+
|
Strong
|
5 of 21
|
A+
|
Strong
|
5 of 21
|
-
|
-
|
-
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Stable
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|
Moody's Investors Service
moodys.com
|
A1
|
Good
|
5 of 21
|
-
|
-
|
-
|
-
|
-
|
-
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Stable
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|
S&P Global Ratings
spratings.com
|
A+
|
Strong
|
5 of 21
|
A+
|
Strong
|
5 of 21
|
-
|
-
|
-
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Stable
|
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
37
CONSOLIDATED PROPERTY CASUALTY INSURANCE HIGHLIGHTS
Consolidated property casualty insurance results include premiums and expenses for our standard market insurance segments (commercial lines and personal lines), our excess and surplus lines segment, our reinsurance assumed operations and our London-based global specialty underwriter known as MSP.
|
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|
|
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|
|
|
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|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
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|
|
2019
|
|
2018
|
|
% Change
|
|
Earned premiums
|
|
$
|
1,267
|
|
|
$
|
1,200
|
|
|
6
|
|
|
Fee revenues
|
|
3
|
|
|
3
|
|
|
0
|
|
|
Total revenues
|
|
1,270
|
|
|
1,203
|
|
|
6
|
|
|
Loss and loss expenses from:
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|
|
|
|
|
|
|
|
|
Current accident year before catastrophe losses
|
|
786
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|
|
779
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|
|
1
|
|
|
Current accident year catastrophe losses
|
|
71
|
|
|
60
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|
|
18
|
|
|
Prior accident years before catastrophe losses
|
|
(70
|
)
|
|
(41
|
)
|
|
(71
|
)
|
|
Prior accident years catastrophe losses
|
|
3
|
|
|
(7
|
)
|
|
nm
|
|
|
Loss and loss expenses
|
|
790
|
|
|
791
|
|
|
0
|
|
|
Underwriting expenses
|
|
389
|
|
|
383
|
|
|
2
|
|
|
Underwriting profit
|
|
$
|
91
|
|
|
$
|
29
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
|
Pt. Change
|
|
Current accident year before catastrophe losses
|
|
62.0
|
%
|
|
64.9
|
%
|
|
(2.9
|
)
|
|
Current accident year catastrophe losses
|
|
5.6
|
|
|
5.0
|
|
|
0.6
|
|
|
Prior accident years before catastrophe losses
|
|
(5.5
|
)
|
|
(3.3
|
)
|
|
(2.2
|
)
|
|
Prior accident years catastrophe losses
|
|
0.2
|
|
|
(0.6
|
)
|
|
0.8
|
|
|
Loss and loss expenses
|
|
62.3
|
|
|
66.0
|
|
|
(3.7
|
)
|
|
Underwriting expenses
|
|
30.7
|
|
|
31.9
|
|
|
(1.2
|
)
|
|
Combined ratio
|
|
93.0
|
%
|
|
97.9
|
%
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
93.0
|
%
|
|
97.9
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%
|
|
(4.9
|
)
|
|
Contribution from catastrophe losses and prior years reserve development
|
|
0.3
|
|
|
1.1
|
|
|
(0.8
|
)
|
|
Combined ratio before catastrophe losses and prior years reserve development
|
|
92.7
|
%
|
|
96.8
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%
|
|
(4.1
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)
|
|
|
|
|
|
|
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|
Our consolidated property casualty insurance operations generated an underwriting profit of $91 million for the first quarter of 2019. The improvement of $62 million, compared with the same period of 2018, was partially offset by an increase of $21 million in losses from weather-related natural catastrophes. Weather-related losses not identified as part of designated catastrophe events for the property casualty industry, typically referred to as noncatastrophe weather losses, decreased by $26 million in the first three months of 2019, offsetting the increase in catastrophe losses. We believe future property casualty underwriting results will continue to benefit from price increases and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices.
For all property casualty lines of business in aggregate, excluding MSP reserves as of the February 28, 2019, acquisition date, net loss and loss expense reserves at March 31, 2019, were $34 million lower than at year-end 2018, including an increase of $47 million for the incurred but not reported (IBNR) portion. The $34 million reserve decrease lowered year-end 2018 net loss and loss expense reserves by less than 1%.
We measure and analyze property casualty underwriting results primarily by the combined ratio and its component ratios. The GAAP-basis combined ratio is the percentage of incurred losses plus all expenses per each earned premium dollar – the lower the ratio, the better the performance. An underwriting profit results when the combined ratio is below 100%. A combined ratio above 100% indicates that an insurance company’s losses and expenses exceeded premiums.
Our consolidated property casualty combined ratio for the first quarter of 2019 decreased by 4.9 percentage points, compared with the same period of 2018, despite an increase of 1.4 points from higher catastrophe losses and loss
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
38
expenses. The increase from catastrophe loss effects was offset by a decrease of 2.5 points from lower noncatastrophe weather-related losses.
The combined ratio can be affected significantly by natural catastrophe losses and other large losses as discussed in detail below. The combined ratio can also be affected by updated estimates of loss and loss expense reserves established for claims that occurred in prior periods, referred to as prior accident years. Net favorable development on prior accident year reserves, including reserves for catastrophe losses, benefited the combined ratio by 5.3 percentage points in the first three months of 2019, compared with 3.9 percentage points in the same period of 2018. Net favorable development is discussed in further detail in Financial Results by property casualty insurance segment.
The ratio for current accident year loss and loss expenses before catastrophe losses improved in the first three months of 2019. That 62.0% ratio decreased 2.9 percentage points compared with the 64.9% accident year 2018 ratio measured as of March 31, 2018, including a decrease of 1.1 points in the ratio for large losses of $1 million or more per claim, discussed below. The effects of lower first-quarter 2019 noncatastrophe weather-related losses contributed approximately 2 points to the overall decrease in the current accident year ratio.
The underwriting expense ratio for the first three months of 2019 decreased, compared with the same period of 2018, reflecting a higher than average expense ratio for the first quarter 2018 due to a lower amount of deferred acquisition costs. The current year period reflects a ratio generally in line with our longer-term historical average, as well as ongoing expense management efforts and higher earned premiums.
Consolidated Property Casualty Insurance Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Agency renewal written premiums
|
|
$
|
1,130
|
|
|
$
|
1,083
|
|
|
4
|
|
|
Agency new business written premiums
|
|
181
|
|
|
159
|
|
|
14
|
|
|
Other written premiums
|
|
70
|
|
|
16
|
|
|
338
|
|
|
Net written premiums
|
|
1,381
|
|
|
1,258
|
|
|
10
|
|
|
Unearned premium change
|
|
(114
|
)
|
|
(58
|
)
|
|
(97
|
)
|
|
Earned premiums
|
|
$
|
1,267
|
|
|
$
|
1,200
|
|
|
6
|
|
|
|
|
|
|
|
|
|
The trends in net written premiums and earned premiums summarized in the table above include the effects of price increases. Price change trends that heavily influence renewal written premium increases or decreases, along with other premium growth drivers for 2019, are discussed in more detail by segment below in Financial Results.
Consolidated property casualty net written premiums for the three months ended March 31, 2019, grew $123 million compared with the same period of 2018. Our premium growth initiatives from prior years have provided an ongoing favorable effect on growth during the current year, particularly as newer agency relationships mature over time.
Consolidated property casualty agency new business written premiums increased by $22 million for the first quarter of 2019, compared with the same period of 2018. The increase was produced by our commercial lines and excess and surplus lines insurance segments. New agency appointments during 2018 and 2019 produced a $10 million increase in standard lines new business for the first three months of 2019 compared with the same period of 2018. As we appoint new agencies that choose to move accounts to us, we report these accounts as new business. While this business is new to us, in many cases it is not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that may be less familiar to our agent upon obtaining it from a competing agent.
Net written premiums for Cincinnati Re, included in other written premiums, increased $38 million for the first quarter of 2019, compared with the same period of 2018. 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. For the first three months of 2019, earned premiums for Cincinnati Re totaled $40 million, compared with $29 million earned in the same period a year ago.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
39
Other written premiums also include premiums ceded to reinsurers as part of our reinsurance ceded program and premiums written through MSP, acquired on February 28, 2019. An increase in ceded premiums reduced net written premiums by $3 million for the first quarter of 2019, compared with the same period of 2018. MSP contributed $21 million to 2019 net written premiums and $11 million to earned premiums.
Catastrophe losses and loss expenses typically have a material effect on property casualty results and can vary significantly from period to period. Losses from natural catastrophes contributed 5.8 percentage points to the combined ratio in the first quarter of 2019, compared with 4.4 percentage points in the same period of 2018. Some of those losses were applicable to annual loss deductible provisions of our collateralized reinsurance funded through catastrophe bonds. For our collateralized reinsurance arrangement that became effective in January 2017, we can recover catastrophe bond funds if aggregate losses, after the $8 million per occurrence deductible, exceed $190 million during an annual coverage period. There were no events between January 1 and March 31, 2019, that met the requirements for recovery, such as occurrences within the specific geographic locations included in the severe convective storm portion of our coverage, after our per occurrence deductible.
For our property catastrophe occurrence and aggregate excess of loss treaty that became effective July 1, 2018, we can recover: catastrophe loss amounts up to $50 million in excess of net $125 million per occurrence for combined business written on a direct basis and by Cincinnati Re; $25 million in excess of $32 million for the aggregation of Cincinnati Re catastrophe occurrences subject to certain deductibles; $50 million in excess of $10 million for business written on a direct basis for the loss perils of earthquake, brushfire and wildfire in certain western states; or various combinations of occurrences with coverage up to the $50 million aggregate limit. The aggregate limit is $25 million if covered losses pertain only to Cincinnati Re. The aggregate recovery from reinsurers providing this coverage totaled $14 million for incurred losses for the first quarter of 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. The 2018 aggregate recovery from reinsurers providing this coverage totaled $36 million for incurred losses, which was applied to two California wildfire events.
The following table shows consolidated property casualty insurance catastrophe losses and loss expenses incurred, net of reinsurance, as well as the effect of loss development on prior period catastrophe events. We individually list declared catastrophe events for which our incurred losses reached or exceeded $10 million.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
40
Consolidated Property Casualty Insurance Catastrophe Losses and Loss Expenses Incurred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, net of reinsurance)
|
|
Three months ended March 31,
|
|
|
|
|
Comm.
|
|
Pers.
|
|
E&S
|
|
|
|
|
|
|
Dates
|
Region
|
|
lines
|
|
lines
|
|
lines
|
|
Other
|
|
Total
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 29-Feb. 1
|
Midwest, Northeast
|
|
$
|
14
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25
|
|
|
Feb. 23-26
|
Midwest, Northeast, South
|
|
11
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
Mar. 12-17
|
Midwest, Northeast, West, South
|
|
4
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
All other 2019 catastrophes
|
|
4
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
Development on 2018 and prior catastrophes
|
|
(6
|
)
|
|
8
|
|
|
—
|
|
|
1
|
|
|
3
|
|
|
Calendar year incurred total
|
|
$
|
27
|
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 8-10
|
West
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
Mar. 1-3
|
Northeast, South
|
|
6
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
Mar. 18-21
|
South
|
|
17
|
|
|
5
|
|
|
1
|
|
|
—
|
|
|
23
|
|
|
All other 2018 catastrophes
|
|
7
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
Development on 2017 and prior catastrophes
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
Calendar year incurred total
|
|
$
|
23
|
|
|
$
|
29
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table includes data for losses incurred of $1 million or more per claim, net of reinsurance.
Consolidated Property Casualty Insurance Losses Incurred by Size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, net of reinsurance)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Current accident year losses greater than $5 million
|
|
$
|
—
|
|
|
$
|
15
|
|
|
nm
|
|
|
Current accident year losses $1 million - $5 million
|
|
37
|
|
|
32
|
|
|
16
|
|
|
Large loss prior accident year reserve development
|
|
16
|
|
|
34
|
|
|
(53
|
)
|
|
Total large losses incurred
|
|
53
|
|
|
81
|
|
|
(35
|
)
|
|
Losses incurred but not reported
|
|
47
|
|
|
10
|
|
|
nm
|
|
|
Other losses excluding catastrophe losses
|
|
493
|
|
|
520
|
|
|
(5
|
)
|
|
Catastrophe losses
|
|
69
|
|
|
51
|
|
|
35
|
|
|
Total losses incurred
|
|
$
|
662
|
|
|
$
|
662
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
Current accident year losses greater than $5 million
|
|
—
|
%
|
|
1.3
|
%
|
|
(1.3
|
)
|
|
Current accident year losses $1 million - $5 million
|
|
2.9
|
|
|
2.7
|
|
|
0.2
|
|
|
Large loss prior accident year reserve development
|
|
1.2
|
|
|
2.8
|
|
|
(1.6
|
)
|
|
Total large loss ratio
|
|
4.1
|
|
|
6.8
|
|
|
(2.7
|
)
|
|
Losses incurred but not reported
|
|
3.7
|
|
|
0.8
|
|
|
2.9
|
|
|
Other losses excluding catastrophe losses
|
|
38.9
|
|
|
43.4
|
|
|
(4.5
|
)
|
|
Catastrophe losses
|
|
5.5
|
|
|
4.2
|
|
|
1.3
|
|
|
Total loss ratio
|
|
52.2
|
%
|
|
55.2
|
%
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
We believe the inherent variability of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the variability in addition to general
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
41
inflationary trends in loss costs. Our analysis continues to indicate no unexpected concentration of large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The first-quarter 2019 property casualty total large losses incurred of $53 million, net of reinsurance, were lower than the $83 million quarterly average during full-year 2018 and lower than the $81 million experienced for the first quarter of 2018. The ratio for these large losses was 2.7 percentage points lower compared with last year’s first quarter. We believe results for the three-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million. Losses by size are discussed in further detail in results of operations by property casualty insurance segment.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
42
FINANCIAL RESULTS
Consolidated results reflect the operating results of each of our five segments along with the parent company, Cincinnati Re, MSP and other activities reported as “Other.” The five segments are:
|
|
|
|
•
|
Commercial lines insurance
|
|
|
|
|
•
|
Personal lines insurance
|
|
|
|
|
•
|
Excess and surplus lines insurance
|
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
43
COMMERCIAL LINES INSURANCE RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Earned premiums
|
|
$
|
810
|
|
|
$
|
790
|
|
|
3
|
|
|
Fee revenues
|
|
1
|
|
|
2
|
|
|
(50
|
)
|
|
Total revenues
|
|
811
|
|
|
792
|
|
|
2
|
|
|
Loss and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophe losses
|
|
510
|
|
|
524
|
|
|
(3
|
)
|
|
Current accident year catastrophe losses
|
|
33
|
|
|
30
|
|
|
10
|
|
|
Prior accident years before catastrophe losses
|
|
(56
|
)
|
|
(28
|
)
|
|
(100
|
)
|
|
Prior accident years catastrophe losses
|
|
(6
|
)
|
|
(7
|
)
|
|
14
|
|
|
Loss and loss expenses
|
|
481
|
|
|
519
|
|
|
(7
|
)
|
|
Underwriting expenses
|
|
254
|
|
|
258
|
|
|
(2
|
)
|
|
Underwriting profit
|
|
$
|
76
|
|
|
$
|
15
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
Current accident year before catastrophe losses
|
|
63.0
|
%
|
|
66.2
|
%
|
|
(3.2
|
)
|
|
Current accident year catastrophe losses
|
|
4.1
|
|
|
3.8
|
|
|
0.3
|
|
|
Prior accident years before catastrophe losses
|
|
(6.9
|
)
|
|
(3.5
|
)
|
|
(3.4
|
)
|
|
Prior accident years catastrophe losses
|
|
(0.8
|
)
|
|
(0.9
|
)
|
|
0.1
|
|
|
Loss and loss expenses
|
|
59.4
|
|
|
65.6
|
|
|
(6.2
|
)
|
|
Underwriting expenses
|
|
31.4
|
|
|
32.7
|
|
|
(1.3
|
)
|
|
Combined ratio
|
|
90.8
|
%
|
|
98.3
|
%
|
|
(7.5
|
)
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
90.8
|
%
|
|
98.3
|
%
|
|
(7.5
|
)
|
|
Contribution from catastrophe losses and prior years reserve development
|
|
(3.6
|
)
|
|
(0.6
|
)
|
|
(3.0
|
)
|
|
Combined ratio before catastrophe losses and prior years reserve development
|
|
94.4
|
%
|
|
98.9
|
%
|
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
Overview
Performance highlights for the commercial lines segment include:
|
|
|
|
•
|
Premiums – Earned premiums and net written premiums for the commercial lines segment grew during the first three months of 2019, in part due to renewal written premium growth that continued to include higher average pricing. Net written premiums increased during the first quarter of 2019, compared with the same period a year ago, following targeted underwriting actions in selected states that significantly slowed growth during 2018. The table below analyzes the primary components of premiums. We continue to use predictive analytics tools to improve pricing precision and segmentation while leveraging our local relationships with agents through the efforts of our teams that work closely with them. We seek to maintain appropriate pricing discipline for both new and renewal business as our agents and underwriters assess account quality to make careful decisions on a case-by-case basis whether to write or renew a policy.
|
Agency renewal written premiums increased by 4% during the first three months of 2019, compared with the same period of 2018. During the first quarter of 2019, our overall standard commercial lines policies averaged estimated renewal price increases at percentages in the low-single-digit range, similar to the fourth quarter of 2018. We continue to segment commercial lines policies, emphasizing identification and retention of policies we believe have relatively stronger pricing. Conversely, we have been seeking stricter renewal terms and conditions on policies we believe have relatively weaker pricing, thus retaining fewer of those policies. We measure average changes in commercial lines renewal pricing as the percentage rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for the respective policies.
Our average overall commercial lines renewal pricing change includes the impact of flat pricing for certain coverages within package policies written for a three-year term that were in force but did not expire during the
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
44
period being measured. Therefore, our reported change in average commercial lines renewal pricing reflects a blend of three-year policies that did not expire and other policies that did expire during the measurement period. For commercial lines policies that did expire and were then renewed during the first quarter of 2019, we estimate that our average percentage price increase for commercial auto continued in the high-single-digit range. The estimated average percentage price change for our commercial property line of business was an increase in the mid-single-digit range and for commercial casualty it was an increase in the low-single-digit range. The estimated average percentage price change for workers’ compensation was a decrease in the mid-single-digit range.
Renewal premiums for certain policies, primarily our commercial casualty and workers’ compensation lines of business, include the results of policy audits that adjust initial premium amounts based on differences between estimated and actual sales or payroll related to a specific policy. Audits completed during the first three months of 2019 contributed $17 million to net written premiums.
New business written premiums for commercial lines increased $16 million during the first three months of 2019, compared with the same period of 2018. The increase reflected growth for each major line of business except workers' compensation, which decreased by approximately $1 million. Trend analysis for year-over-year comparisons of individual quarters is more difficult to assess for commercial lines new business written premiums, due to inherent variability. That variability is often driven by larger policies with annual premiums greater than $100,000.
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our commercial lines insurance segment, an increase in ceded premiums reduced net written premiums by less than $1 million for the first three months of 2019, compared with the same period of 2018.
Commercial Lines Insurance Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Three months ended March 31,
|
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Agency renewal written premiums
|
|
|
$
|
799
|
|
|
$
|
771
|
|
|
4
|
|
|
Agency new business written premiums
|
|
|
120
|
|
|
104
|
|
|
15
|
|
|
Other written premiums
|
|
|
(23
|
)
|
|
(21
|
)
|
|
(10
|
)
|
|
Net written premiums
|
|
|
896
|
|
|
854
|
|
|
5
|
|
|
Unearned premium change
|
|
|
(86
|
)
|
|
(64
|
)
|
|
(34
|
)
|
|
Earned premiums
|
|
|
$
|
810
|
|
|
$
|
790
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
•
|
Combined ratio – The commercial lines combined ratio improved by 7.5 percentage points for the first quarter of 2019, compared with the same period a year ago, despite a ratio increase of 0.4 points in losses from natural catastrophes. The improvement included a higher level of favorable reserve development on prior accident years in addition to better loss experience for the current accident year.
|
The commercial lines ratio for current accident year loss and loss expenses before catastrophe losses improved in the first three months of 2019. That 63.0% ratio decreased 3.2 percentage points compared with the 66.2% accident year 2018 ratio measured as of March 31, 2018, including a decrease of 1.5 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
Catastrophe losses and loss expenses accounted for 3.3 percentage points of the combined ratio for the first three months of 2019, compared with 2.9 percentage points for the same period a year ago. Through 2018, the 10-year annual average for that catastrophe measure for the commercial lines segment was 5.4 percentage points, and the five-year annual average was 5.1 percentage points. The three-month 2019 ratio for noncatastrophe weather-related losses, at 3.5%, was 3.0 percentage points better than the same period a year ago.
The net effect of reserve development on prior accident years during the first three months of 2019 was favorable for commercial lines overall by $62 million, compared with $35 million for the same period in 2018. For the first three months of 2019, our commercial casualty and workers' compensation lines of business were the largest contributors to the total commercial lines net favorable reserve development on prior accident years, representing approximately three-fourths of the total. The net favorable reserve development recognized during the first three months of 2019 for our commercial lines insurance segment was largely for accident years 2016 through 2018 and was primarily due to lower-than-anticipated loss emergence on known claims. Reserve
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
45
estimates are inherently uncertain as described in our 2018 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 54.
The commercial lines underwriting expense ratio for the first three months of 2019 decreased, compared with the same period a year ago reflecting a higher than average expense ratio for the first quarter 2018 due to a lower amount of deferred acquisition costs. The current year period reflects a ratio generally in line with our longer-term historical average, as well as ongoing expense management efforts and higher earned premiums.
Commercial Lines Insurance Losses Incurred by Size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, net of reinsurance)
|
|
|
Three months ended March 31,
|
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Current accident year losses greater than $5 million
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
nm
|
|
|
Current accident year losses $1 million - $5 million
|
|
|
26
|
|
|
22
|
|
|
18
|
|
|
Large loss prior accident year reserve development
|
|
|
13
|
|
|
29
|
|
|
(55
|
)
|
|
Total large losses incurred
|
|
|
39
|
|
|
66
|
|
|
(41
|
)
|
|
Losses incurred but not reported
|
|
|
43
|
|
|
16
|
|
|
169
|
|
|
Other losses excluding catastrophe losses
|
|
|
286
|
|
|
325
|
|
|
(12
|
)
|
|
Catastrophe losses
|
|
|
25
|
|
|
22
|
|
|
14
|
|
|
Total losses incurred
|
|
|
$
|
393
|
|
|
$
|
429
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
|
Pt. Change
|
|
Current accident year losses greater than $5 million
|
|
|
—
|
%
|
|
1.9
|
%
|
|
(1.9
|
)
|
|
Current accident year losses $1 million - $5 million
|
|
|
3.3
|
|
|
2.9
|
|
|
0.4
|
|
|
Large loss prior accident year reserve development
|
|
|
1.6
|
|
|
3.6
|
|
|
(2.0
|
)
|
|
Total large loss ratio
|
|
|
4.9
|
|
|
8.4
|
|
|
(3.5
|
)
|
|
Losses incurred but not reported
|
|
|
5.4
|
|
|
2.1
|
|
|
3.3
|
|
|
Other losses excluding catastrophe losses
|
|
|
35.1
|
|
|
41.1
|
|
|
(6.0
|
)
|
|
Catastrophe losses
|
|
|
3.1
|
|
|
2.8
|
|
|
0.3
|
|
|
Total loss ratio
|
|
|
48.5
|
%
|
|
54.4
|
%
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The first-quarter 2019 commercial lines total large losses incurred of $39 million, net of reinsurance, were lower than the quarterly average of $71 million during full-year 2018 and the $66 million total large losses incurred for the first quarter of 2018. The decease in commercial
lines large losses for the first three months of 2019 was largely due to our commercial casualty and commercial property lines of business. The first-quarter 2019 ratio for commercial lines total large losses was 3.5 percentage points lower compared with last year’s first-quarter ratio. We believe results for the three-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
46
PERSONAL LINES INSURANCE RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Earned premiums
|
|
$
|
344
|
|
|
$
|
325
|
|
|
6
|
|
|
Fee revenues
|
|
1
|
|
|
1
|
|
|
0
|
|
|
Total revenues
|
|
345
|
|
|
326
|
|
|
6
|
|
|
Loss and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophe losses
|
|
209
|
|
|
210
|
|
|
0
|
|
|
Current accident year catastrophe losses
|
|
38
|
|
|
29
|
|
|
31
|
|
|
Prior accident years before catastrophe losses
|
|
(5
|
)
|
|
(1
|
)
|
|
(400
|
)
|
|
Prior accident years catastrophe losses
|
|
8
|
|
|
—
|
|
|
nm
|
|
|
Loss and loss expenses
|
|
250
|
|
|
238
|
|
|
5
|
|
|
Underwriting expenses
|
|
99
|
|
|
97
|
|
|
2
|
|
|
Underwriting loss
|
|
$
|
(4
|
)
|
|
$
|
(9
|
)
|
|
56
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
Current accident year before catastrophe losses
|
|
60.6
|
%
|
|
64.5
|
%
|
|
(3.9
|
)
|
|
Current accident year catastrophe losses
|
|
10.9
|
|
|
9.0
|
|
|
1.9
|
|
|
Prior accident years before catastrophe losses
|
|
(1.4
|
)
|
|
(0.1
|
)
|
|
(1.3
|
)
|
|
Prior accident years catastrophe losses
|
|
2.4
|
|
|
(0.1
|
)
|
|
2.5
|
|
|
Loss and loss expenses
|
|
72.5
|
|
|
73.3
|
|
|
(0.8
|
)
|
|
Underwriting expenses
|
|
28.8
|
|
|
29.9
|
|
|
(1.1
|
)
|
|
Combined ratio
|
|
101.3
|
%
|
|
103.2
|
%
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
101.3
|
%
|
|
103.2
|
%
|
|
(1.9
|
)
|
|
Contribution from catastrophe losses and prior years reserve development
|
|
11.9
|
|
|
8.8
|
|
|
3.1
|
|
|
Combined ratio before catastrophe losses and prior years reserve development
|
|
89.4
|
%
|
|
94.4
|
%
|
|
(5.0
|
)
|
|
|
|
|
|
|
|
|
Overview
Performance highlights for the personal lines segment include:
|
|
|
|
•
|
Premiums – Personal lines earned premiums and net written premiums continued to grow during the first quarter of 2019, largely due to increases in agency renewal written premiums reflecting higher average pricing. Personal lines net written premiums from high net worth policies totaled approximately $77 million for the first three months of 2019, compared with $64 million for the same period of 2018. The table below analyzes the primary components of premiums.
|
Agency renewal written premiums increased 7% for the first three months of 2019, largely due to rate increases in selected states. We estimate that premium rates for our personal auto line of business increased at average percentages in the high-single-digit range during the first three months of 2019. For our homeowner line of business, we estimate that premium rates for the first three months of 2019 increased at average percentages in the mid-single-digit range. For both our personal auto and homeowner lines of business, some individual policies experienced lower or higher rate changes based on each risk's specific characteristics and enhanced pricing precision enabled by predictive models.
Personal lines new business written premiums for the first quarter of 2019 decreased $4 million, reflecting pricing discipline particularly in selected states, compared with the same period of 2018.
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our personal lines insurance segment, an increase in ceded premiums reduced net written premiums by less than $1 million for the first three months of 2019, compared with the same period of 2018.
We continue to implement strategies discussed in our 2018 Annual Report on Form 10-K, Item 1, Strategic Initiatives, Page 14, to enhance our responsiveness to marketplace changes and to help achieve our long-term
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
47
objectives for personal lines growth and profitability. These strategies include initiatives to more profitably underwrite personal auto policies.
Personal Lines Insurance Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Agency renewal written premiums
|
|
$
|
282
|
|
|
$
|
264
|
|
|
7
|
|
|
Agency new business written premiums
|
|
35
|
|
|
39
|
|
|
(10
|
)
|
|
Other written premiums
|
|
(8
|
)
|
|
(6
|
)
|
|
(33
|
)
|
|
Net written premiums
|
|
309
|
|
|
297
|
|
|
4
|
|
|
Unearned premium change
|
|
35
|
|
|
28
|
|
|
25
|
|
|
Earned premiums
|
|
$
|
344
|
|
|
$
|
325
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
•
|
Combined ratio – Our personal lines combined ratio improved slightly for the first three months of 2019, compared with the same period a year ago. The improvement was primarily due to better experience in the ratio for current accident year loss and loss expenses before catastrophe losses that offset a ratio for weather-related natural catastrophe losses and loss expenses that was 4.4 percentage points worse.
|
The personal lines ratio for current accident year loss and loss expenses before catastrophe losses improved in the first three months of 2019. That 60.6% ratio decreased 3.9 percentage points compared with the 64.5% accident year 2018 ratio measured as of March 31, 2018, including a decrease of 0.1 percentage point in the ratio for large losses of $1 million or more per claim, discussed below.
Catastrophe losses and loss expenses accounted for 13.3 percentage points of the combined ratio for the first three months of 2019, compared with 8.9 percentage points for the same period of last year. Through 2018, the 10-year annual average catastrophe loss ratio for the personal lines segment was 10.9 percentage points, and the five-year annual average was 8.9 percentage points. The ratio for noncatastrophe weather-related losses for the first three months of 2019, at 6.2%, was 1.2 percentage points better than the same period a year ago.
In addition to the average rate increases discussed above, we continue to refine our pricing to better match premiums to the risk of loss on individual policies. Improved pricing precision and broad-based rate increases are expected to help position the combined ratio at a profitable level over the long term. In addition, greater geographic diversification is expected to reduce the volatility of homeowner loss ratios attributable to weather-related catastrophe losses over time.
Our homeowner line of business, representing 42% of our 2018 personal lines earned premiums, was the only major line in this segment with a three-month 2019 total loss and loss expense ratio before catastrophe losses significantly higher than we desired, although it improved compared with the prior-year period. Its catastrophe loss experience has been elevated in recent quarters, largely due to wildfire losses that have affected much of the property casualty industry. In recent quarters our homeowner policies have experienced average renewal price increases at percentages near the high end of the mid-single-digit range. We believe rate increases and other actions to improve pricing precision and reduce loss costs will improve future profitability.
The net effect of reserve development on prior accident years during the first three months of 2019 was unfavorable for personal lines overall by $3 million, compared with favorable net reserve development of $1 million for the same period of 2018. Our homeowner line of business was the largest contributor to the 2018 total personal lines net unfavorable reserve development on prior accident years, partially offset by net favorable reserve development for our personal auto and other personal lines of business. The net unfavorable reserve development was primarily due to higher-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2018 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 54.
The underwriting expense ratio decreased for the first three months of 2019, compared with the same period a year ago, reflecting a higher than average expense ratio for the first quarter 2018 due to a lower amount of deferred acquisition costs. The current year period reflects a ratio generally in line with our longer-term historical average, as well as ongoing expense management efforts and higher earned premiums.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
48
Personal Lines Insurance Losses Incurred by Size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, net of reinsurance)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Current accident year losses greater than $5 million
|
|
$
|
—
|
|
|
$
|
—
|
|
|
nm
|
|
|
Current accident year losses $1 million - $5 million
|
|
10
|
|
|
10
|
|
|
—
|
|
|
Large loss prior accident year reserve development
|
|
2
|
|
|
5
|
|
|
(60
|
)
|
|
Total large losses incurred
|
|
12
|
|
|
15
|
|
|
(20
|
)
|
|
Losses incurred but not reported
|
|
4
|
|
|
(1
|
)
|
|
nm
|
|
|
Other losses excluding catastrophe losses
|
|
163
|
|
|
167
|
|
|
(2
|
)
|
|
Catastrophe losses
|
|
45
|
|
|
29
|
|
|
55
|
|
|
Total losses incurred
|
|
$
|
224
|
|
|
$
|
210
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
Current accident year losses greater than $5 million
|
|
—
|
%
|
|
—
|
%
|
|
0.0
|
|
|
Current accident year losses $1 million - $5 million
|
|
2.8
|
|
|
2.9
|
|
|
(0.1
|
)
|
|
Large loss prior accident year reserve development
|
|
0.6
|
|
|
1.7
|
|
|
(1.1
|
)
|
|
Total large loss ratio
|
|
3.4
|
|
|
4.6
|
|
|
(1.2
|
)
|
|
Losses incurred but not reported
|
|
1.0
|
|
|
(0.4
|
)
|
|
1.4
|
|
|
Other losses excluding catastrophe losses
|
|
47.4
|
|
|
51.6
|
|
|
(4.2
|
)
|
|
Catastrophe losses
|
|
13.1
|
|
|
8.8
|
|
|
4.3
|
|
|
Total loss ratio
|
|
64.9
|
%
|
|
64.6
|
%
|
|
0.3
|
|
|
|
|
|
|
|
|
|
We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the first quarter of 2019, the personal lines total large loss ratio, net of reinsurance, was 1.2 percentage points lower than last year’s first quarter. The decrease in personal lines large losses for the first three months of 2019 occurred primarily for our homeowner line of business. We believe results for the three-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
49
EXCESS AND SURPLUS LINES INSURANCE RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Earned premiums
|
|
$
|
63
|
|
|
$
|
56
|
|
|
13
|
|
|
Fee revenues
|
|
1
|
|
|
—
|
|
|
nm
|
|
|
Total revenues
|
|
64
|
|
|
56
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophe losses
|
|
35
|
|
|
30
|
|
|
17
|
|
|
Current accident year catastrophe losses
|
|
—
|
|
|
1
|
|
|
(100
|
)
|
|
Prior accident years before catastrophe losses
|
|
(2
|
)
|
|
(10
|
)
|
|
80
|
|
|
Prior accident years catastrophe losses
|
|
—
|
|
|
—
|
|
|
0
|
|
|
Loss and loss expenses
|
|
33
|
|
|
21
|
|
|
57
|
|
|
Underwriting expenses
|
|
20
|
|
|
17
|
|
|
18
|
|
|
Underwriting profit
|
|
$
|
11
|
|
|
$
|
18
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
Current accident year before catastrophe losses
|
|
55.5
|
%
|
|
54.6
|
%
|
|
0.9
|
|
|
Current accident year catastrophe losses
|
|
0.3
|
|
|
1.8
|
|
|
(1.5
|
)
|
|
Prior accident years before catastrophe losses
|
|
(4.2
|
)
|
|
(17.2
|
)
|
|
13.0
|
|
|
Prior accident years catastrophe losses
|
|
(0.1
|
)
|
|
0.1
|
|
|
(0.2
|
)
|
|
Loss and loss expenses
|
|
51.5
|
|
|
39.3
|
|
|
12.2
|
|
|
Underwriting expenses
|
|
32.0
|
|
|
29.5
|
|
|
2.5
|
|
|
Combined ratio
|
|
83.5
|
%
|
|
68.8
|
%
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
83.5
|
%
|
|
68.8
|
%
|
|
14.7
|
|
|
Contribution from catastrophe losses and prior years reserve development
|
|
(4.0
|
)
|
|
(15.3
|
)
|
|
11.3
|
|
|
Combined ratio before catastrophe losses and prior years reserve development
|
|
87.5
|
%
|
|
84.1
|
%
|
|
3.4
|
|
|
|
|
|
|
|
|
|
Overview
Performance highlights for the excess and surplus lines segment include:
|
|
|
|
•
|
Premiums – Excess and surplus lines net written premiums continued to grow during the first quarter of 2019, primarily due to an increase in new business written premiums. For the first three months of 2019, excess and surplus lines policy renewals experienced estimated average price increases at percentages in the low-single-digit range. We measure average changes in excess and surplus lines renewal pricing as the percentage rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies.
|
New business written premiums produced by agencies increased by $10 million for the first quarter of 2019, compared with the same period of 2018. We believe the unusually large increase is a reflection of more opportunities in the marketplace for insurance companies to obtain higher premium rates, plus our additional marketing efforts. Some of what we report as new business came from accounts that were not new to our agents. We believe our agents’ seasoned accounts tend to be priced more accurately than business that may be less familiar to them.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
50
Excess and Surplus Lines Insurance Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Agency renewal written premiums
|
|
$
|
49
|
|
|
$
|
48
|
|
|
2
|
|
|
Agency new business written premiums
|
|
26
|
|
|
16
|
|
|
63
|
|
|
Other written premiums
|
|
(4
|
)
|
|
(3
|
)
|
|
(33
|
)
|
|
Net written premiums
|
|
71
|
|
|
61
|
|
|
16
|
|
|
Unearned premium change
|
|
(8
|
)
|
|
(5
|
)
|
|
(60
|
)
|
|
Earned premiums
|
|
$
|
63
|
|
|
$
|
56
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
•
|
Combined ratio – The excess and surplus lines combined ratio increased by 14.7 percentage points for the first three months of 2019, compared with the same period of 2018. The increase was primarily due to less favorable reserve development on prior accident years.
|
The excess and surplus lines ratio for current accident year loss and loss expenses before catastrophe losses rose in the first three months of 2019. That 55.5% ratio increased 0.9 percentage points compared with the 54.6% accident year 2018 ratio measured as of March 31, 2018, including an increase of 1.6 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
Excess and surplus lines net favorable reserve development on prior accident years, as a ratio to earned premiums, was 4.3% for the first three months of 2019, compared with 17.1% for the same period of 2018. The net favorable reserve development recognized during the first three months of 2019 was primarily attributable to accident year 2018. The favorable reserve development was due primarily to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2018 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 54.
The excess and surplus lines underwriting expense ratio for the first quarter of 2019 increased, compared with the same period of 2018, primarily due to higher internal expense allocations that offset higher earned premiums and ongoing expense management efforts.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
51
Excess and Surplus Lines Insurance Losses Incurred by Size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, net of reinsurance)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Current accident year losses greater than $5 million
|
|
$
|
—
|
|
|
$
|
—
|
|
|
nm
|
|
|
Current accident year losses $1 million - $5 million
|
|
1
|
|
|
—
|
|
|
nm
|
|
|
Large loss prior accident year reserve development
|
|
1
|
|
|
—
|
|
|
nm
|
|
|
Total large losses incurred
|
|
2
|
|
|
—
|
|
|
nm
|
|
|
Losses incurred but not reported
|
|
—
|
|
|
(5
|
)
|
|
nm
|
|
|
Other losses excluding catastrophe losses
|
|
19
|
|
|
14
|
|
|
36
|
|
|
Catastrophe losses
|
|
—
|
|
|
1
|
|
|
nm
|
|
|
Total losses incurred
|
|
$
|
21
|
|
|
$
|
10
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
Current accident year losses greater than $5 million
|
|
—
|
%
|
|
—
|
%
|
|
0.0
|
|
|
Current accident year losses $1 million - $5 million
|
|
1.6
|
|
|
—
|
|
|
1.6
|
|
|
Large loss prior accident year reserve development
|
|
1.2
|
|
|
(0.4
|
)
|
|
1.6
|
|
|
Total large loss ratio
|
|
2.8
|
|
|
(0.4
|
)
|
|
3.2
|
|
|
Losses incurred but not reported
|
|
0.8
|
|
|
(9.0
|
)
|
|
9.8
|
|
|
Other losses excluding catastrophe losses
|
|
29.1
|
|
|
26.4
|
|
|
2.7
|
|
|
Catastrophe losses
|
|
0.2
|
|
|
1.8
|
|
|
(1.6
|
)
|
|
Total loss ratio
|
|
32.9
|
%
|
|
18.8
|
%
|
|
14.1
|
|
|
|
|
|
|
|
|
|
We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the first quarter of 2019, the excess and surplus lines total ratio for large losses, net of reinsurance, was 3.2 percentage points higher than last year’s first quarter. We believe results for the three-month period largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
52
LIFE INSURANCE RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Earned premiums
|
|
$
|
66
|
|
|
$
|
60
|
|
|
10
|
|
Fee revenues
|
|
1
|
|
|
1
|
|
|
0
|
|
Total revenues
|
|
67
|
|
|
61
|
|
|
10
|
|
Contract holders' benefits incurred
|
|
70
|
|
|
63
|
|
|
11
|
|
Investment interest credited to contract holders'
|
|
(24
|
)
|
|
(24
|
)
|
|
0
|
|
Underwriting expenses incurred
|
|
22
|
|
|
20
|
|
|
10
|
|
Total benefits and expenses
|
|
68
|
|
|
59
|
|
|
15
|
|
Life insurance segment profit (loss)
|
|
$
|
(1
|
)
|
|
$
|
2
|
|
|
nm
|
|
|
|
|
|
|
|
|
Overview
Performance highlights for the life insurance segment include:
|
|
|
|
•
|
Revenues – Revenues increased for the three months ended March 31, 2019, compared with the same period a year ago, primarily due to higher earned premiums from term life insurance, our largest life insurance product line.
|
Net in-force life insurance policy face amounts increased to $67.304 billion at March 31, 2019, from $66.142 billion at year-end 2018.
Fixed annuity deposits received for the three months ended March 31, 2019, were $7 million, matching the same period of 2018. Fixed annuity deposits have a minimal impact to earned premiums because deposits received are initially recorded as liabilities. Profit is earned over time by way of interest-rate spreads. We do not write variable or equity-indexed annuities.
Life Insurance Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Term life insurance
|
|
$
|
45
|
|
|
$
|
41
|
|
|
10
|
|
Universal life insurance
|
|
10
|
|
|
9
|
|
|
11
|
|
Other life insurance and annuity products
|
|
11
|
|
|
10
|
|
|
10
|
|
Net earned premiums
|
|
$
|
66
|
|
|
$
|
60
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
•
|
Profitability – Our life insurance segment typically reports a small profit or loss on a GAAP basis because profits from investment income spreads are included in our investment segment results. We include only investment income credited to contract holders (including interest assumed in life insurance policy reserve calculations) in our life insurance segment results. A loss of $1 million for our life insurance segment in the first three months of 2019, compared with a gain of $2 million for the same period of 2018, was primarily due to less favorable effects from the unlocking of actuarial assumptions.
|
Life insurance segment benefits and expenses consist principally of contract holders’ (policyholders’) benefits incurred related to traditional life and interest-sensitive products and operating expenses incurred, net of deferred acquisition costs. Total benefits increased in the first three months of 2019. Life policy and investment contract reserves increased with continued growth in net in-force life insurance policy face amounts. Mortality results increased, compared with the same period of 2018, and were slightly higher than our 2019 projections.
Underwriting expenses for the first three months of 2019 increased compared with the same period a year ago. For the first three months of 2019, unlocking of interest rate and other actuarial assumptions decreased the amount of expenses deferred to future periods, increasing underwriting expenses. For the first three months of 2018, unlocking of interest rate and other assumptions had an immaterial impact on the amount of expenses deferred to future periods.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
53
We recognize that assets under management, capital appreciation and investment income are integral to evaluating the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and investment gains or losses from life-insurance-related invested assets, the life insurance company reported net income of $10 million for the three months ended March 31, 2019, compared with net income of $13 million for the same period of 2018. The life insurance company portfolio had net after-tax investment losses of $1 million for the three months ended March 31, 2019, compared with less than $1 million of net after-tax investment gains for the three months ended March 31, 2018.
INVESTMENTS RESULTS
Overview
The investments segment contributes investment income and investment gains and losses to results of operations. Investments traditionally are our primary source of pretax and after-tax profits.
Investment Income
Pretax investment income increased 5% for the first quarter of 2019, compared with the same period of 2018. Interest income increased by $1 million as net purchases of fixed-maturity securities offset the continuing effects of the low interest rate environment. Higher dividend income reflected rising dividend rates and net purchases of equity securities in recent quarters.
Investments Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Total investment income, net of expenses
|
|
$
|
157
|
|
|
$
|
150
|
|
|
5
|
|
Investment interest credited to contract holders'
|
|
(24
|
)
|
|
(24
|
)
|
|
0
|
|
Investment gains and losses, net
|
|
663
|
|
|
(191
|
)
|
|
nm
|
|
Investments profit, pretax
|
|
$
|
796
|
|
|
$
|
(65
|
)
|
|
nm
|
|
|
|
|
|
|
|
|
We continue to position our portfolio considering both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield. The table below shows the average pretax yield-to-amortized cost associated with expected principal redemptions for our fixed-maturity portfolio. The expected principal redemptions are based on par amounts and include dated maturities, calls and prefunded municipal bonds that we expect will be called during each respective time period.
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
% Yield
|
|
Principal redemptions
|
|
At March 31, 2019
|
|
|
Fixed-maturity pretax yield profile:
|
|
|
|
|
Expected to mature during the remainder of 2019
|
5.50
|
|
$
|
439
|
|
|
Expected to mature during 2020
|
4.62
|
|
670
|
|
|
Expected to mature during 2021
|
4.34
|
|
987
|
|
|
Average yield and total expected maturities from the remainder of 2019 through 2021
|
4.68
|
|
$
|
2,096
|
|
|
|
|
|
|
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
54
The table below shows the average pretax yield-to-amortized cost for fixed-maturity securities acquired during the periods indicated. The average yield for total fixed-maturity securities acquired during the first three months of 2019 was higher than the 4.20% average yield-to-amortized cost of the fixed-maturity securities portfolio at the end of 2018. Our fixed-maturity portfolio's average yield of 4.15% for the first three months of 2019, from the investment income table below, was lower than that yield for the year-end 2018 fixed-maturities portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
Average pretax yield-to-amortized cost on new fixed-maturities:
|
|
|
|
|
|
Acquired taxable fixed-maturities
|
|
4.99
|
%
|
|
4.11
|
%
|
|
Acquired tax-exempt fixed-maturities
|
|
3.52
|
|
|
3.32
|
|
|
Average total fixed-maturities acquired
|
|
4.79
|
|
|
4.02
|
|
|
|
|
|
|
|
While our bond portfolio more than covers our insurance reserve liabilities, we believe our diversified common stock portfolio of mainly blue chip, dividend-paying companies represents one of our best investment opportunities for the long term. We discussed our portfolio strategies in our 2018 Annual Report on Form 10-K, Item 1, Investments Segment, Page 26, and Item 7, Investments Outlook, Page 91. We discuss risks related to our investment income and our fixed-maturity and equity investment portfolios in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk.
The table below provides details about investment income. Average yields in this table are based on the average invested asset and cash amounts indicated in the table, using fixed-maturity securities valued at amortized cost and all other securities at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Investment income:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
111
|
|
|
$
|
110
|
|
|
1
|
|
Dividends
|
|
46
|
|
|
42
|
|
|
10
|
|
Other
|
|
3
|
|
|
1
|
|
|
200
|
|
Less investment expenses
|
|
3
|
|
|
3
|
|
|
0
|
|
Investment income, pretax
|
|
157
|
|
|
150
|
|
|
5
|
|
Less income taxes
|
|
24
|
|
|
23
|
|
|
4
|
|
Total investment income, after-tax
|
|
$
|
133
|
|
|
$
|
127
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Investment returns:
|
|
|
|
|
|
|
|
Average invested assets plus cash and cash equivalents
|
|
$
|
17,924
|
|
|
$
|
17,242
|
|
|
|
|
Average yield pretax
|
|
3.50
|
%
|
|
3.48
|
%
|
|
|
|
Average yield after-tax
|
|
2.97
|
|
|
2.95
|
|
|
|
|
Effective tax rate
|
|
15.5
|
|
|
15.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity returns:
|
|
|
|
|
|
|
|
Average amortized cost
|
|
$
|
10,689
|
|
|
$
|
10,339
|
|
|
|
|
Average yield pretax
|
|
4.15
|
%
|
|
4.26
|
%
|
|
|
|
Average yield after-tax
|
|
3.46
|
|
|
3.56
|
|
|
|
|
Effective tax rate
|
|
16.7
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
55
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. The change in fair value for equity securities still held are included in investment gains and losses and also in net income
. The change in unrealized gains or losses for fixed-maturity securities are included as a component of other comprehensive income (OCI). Accounting requirements for other-than-temporary impairment (OTTI) charges for the fixed-maturity portfolio are disclosed in our 2018 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 128.
The table below summarizes total investment gains and losses, before taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
Investment gains and losses:
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
Investment gains and losses on securities sold, net
|
|
$
|
4
|
|
|
$
|
3
|
|
|
Unrealized gains and losses on securities still held, net
|
|
652
|
|
|
(198
|
)
|
|
Subtotal
|
|
656
|
|
|
(195
|
)
|
|
Fixed maturities:
|
|
|
|
|
|
Gross realized gains
|
|
2
|
|
|
4
|
|
|
Other
|
|
5
|
|
|
—
|
|
|
Total investment gains and losses reported in net income
|
|
663
|
|
|
(191
|
)
|
|
Change in unrealized investment gains and losses:
|
|
|
|
|
|
Fixed maturities
|
|
242
|
|
|
(221
|
)
|
|
Total unrealized investment gains and losses reported in OCI
|
|
242
|
|
|
(221
|
)
|
|
Total
|
|
$
|
905
|
|
|
$
|
(412
|
)
|
|
|
|
|
|
|
Of the 3,746 fixed-maturity securities in the portfolio, no securities were trading below 70% of amortized cost at March 31, 2019. Our asset impairment committee regularly monitors the portfolio, including a quarterly review of the entire portfolio for potential OTTI charges. We believe that if liquidity in the markets were to significantly deteriorate or economic conditions were to significantly weaken, we could experience declines in portfolio values and possibly additional OTTI charges.
We had no OTTI charges for either the first three months of 2019 or the first three months of 2018.
OTHER
We report as Other the noninvestment operations of the parent company and a noninsurance subsidiary, CFC Investment Company. We also report as Other the underwriting results of Cincinnati Re, our reinsurance assumed operation, and MSP, which was acquired on February 28, 2019. Underwriting results in the table below for Cincinnati Re and MSP include earned premiums, loss and loss expenses and underwriting expenses.
Total revenues for the first three months of 2019 for our Other operations increased, compared with the same period of 2018, primarily due to earned premiums from Cincinnati Re and MSP, which each increased by $11 million. Total expenses for Other increased for the first three months of 2019, primarily due to more losses and loss expenses from Cincinnati Re.
Other loss in the table below represents losses before income taxes. For both periods shown, Other loss resulted largely from interest expense from debt of the parent company.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Interest and fees on loans and leases
|
|
$
|
2
|
|
|
$
|
1
|
|
|
100
|
|
Earned premiums
|
|
50
|
|
|
29
|
|
|
72
|
|
Total revenues
|
|
52
|
|
|
30
|
|
|
73
|
|
Interest expense
|
|
13
|
|
|
13
|
|
|
0
|
|
Loss and loss expenses
|
|
26
|
|
|
13
|
|
|
100
|
|
Underwriting expenses
|
|
16
|
|
|
11
|
|
|
45
|
|
Operating expenses
|
|
8
|
|
|
4
|
|
|
100
|
|
Total expenses
|
|
63
|
|
|
41
|
|
|
54
|
|
Other loss
|
|
$
|
(11
|
)
|
|
$
|
(11
|
)
|
|
0
|
|
|
|
|
|
|
|
|
TAXES
We had $172 million of income tax expense for the three months ended March 31, 2019, compared with an income tax benefit of $19 million for the same period of 2018. The effective tax rate for the three months ended March 31, 2019, was 19.8% compared with 38.0% for the same period last year. The change in our effective tax rate between years was primarily due to a large net investment gain included in income for 2019 versus a net investment loss included in income for the prior-year period.
Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See Tax-Exempt Fixed Maturities in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk for further discussion on municipal bond purchases in our fixed-maturity investment portfolio. For our property casualty insurance subsidiaries, approximately 75% of interest from tax-advantaged fixed-maturity investments and approximately 40% of dividends from qualified equities are exempt from federal tax after applying proration from the 1986 Tax Reform Act. Our noninsurance companies own an immaterial amount of tax-advantaged fixed-maturity investments. For our noninsurance companies, the dividend received deduction exempts 50% of dividends from qualified equities. Our life insurance company does not own tax-advantaged fixed-maturity investments or equities subject to the dividend received deduction. Details about our effective tax rate are in this quarterly report Item 1, Note 9 – Income Taxes.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
57
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2019, shareholders’ equity was $8.630 billion, compared with $7.833 billion at December 31, 2018. Total debt was $820 million at March 31, 2019, unchanged from December 31, 2018. At March 31, 2019, cash and cash equivalents totaled $802 million, compared with $784 million at December 31, 2018.
SOURCES OF LIQUIDITY
Subsidiary Dividends
Our lead insurance subsidiary declared dividends of $200 million to the parent company in the first three months of 2019, compared with $100 million for the same period of 2018. For full-year 2018, subsidiary dividends declared totaled $500 million. State of Ohio regulatory requirements restrict the dividends our insurance subsidiary can pay. For full-year 2019, total dividends that our insurance subsidiary could pay to our parent company without regulatory approval are approximately $626 million. We do not expect MSP to pay a dividend to the parent company during 2019.
Investing Activities
Investment income is a source of liquidity for both the parent company and its insurance subsidiary. We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth.
Parent company obligations can be funded with income on investments held at the parent-company level or through sales of securities in that portfolio, although our investment philosophy seeks to compound cash flows over the long term. These sources of capital can help minimize subsidiary dividends to the parent company, protecting insurance subsidiary capital.
For a discussion of our historic investment strategy, portfolio allocation and quality, see our 2018 Annual Report on Form 10-K, Item 1, Investments Segment, Page 26.
Insurance Underwriting
Our property casualty and life insurance underwriting operations provide liquidity because we generally receive premiums before paying losses under the policies purchased with those premiums. After satisfying our cash requirements, we use excess cash flows for investment, increasing future investment income.
Historically, cash receipts from property casualty and life insurance premiums, along with investment income, have been more than sufficient to pay claims, operating expenses and dividends to the parent company.
The table below shows a summary of operating cash flow for property casualty insurance (direct method):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
2018
|
|
% Change
|
|
Premiums collected
|
|
$
|
1,349
|
|
|
$
|
1,269
|
|
|
6
|
|
|
Loss and loss expenses paid
|
|
(824
|
)
|
|
(714
|
)
|
|
(15
|
)
|
|
Commissions and other underwriting expenses paid
|
|
(514
|
)
|
|
(519
|
)
|
|
1
|
|
|
Cash flow from underwriting
|
|
11
|
|
|
36
|
|
|
(69
|
)
|
|
Investment income received
|
|
113
|
|
|
108
|
|
|
5
|
|
|
Cash flow from operations
|
|
$
|
124
|
|
|
$
|
144
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
Collected premiums for property casualty insurance rose $80 million during the first three months of 2019, compared with the same period in 2018. Loss and loss expenses paid for the 2019 period increased $110 million. Commissions and other underwriting expenses paid decreased $5 million, primarily due to higher commissions paid to agencies, reflecting the increase in collected premiums.
We discuss our future obligations for claims payments and for underwriting expenses in our 2018 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 97, and Other Commitments also on Page 97.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
58
Capital Resources
At March 31, 2019, our debt-to-total-capital ratio was 8.7%, with $788 million in long-term debt and $32 million in borrowing on our revolving short-term line of credit. That line of credit had a $32 million balance at December 31, 2018. At March 31, 2019, $268 million was available for future cash management needs as part of the general provisions of the line of credit agreement, with another $300 million available as part of an accordion feature. Based on our capital requirements at March 31, 2019, during the remainder of the year we do not anticipate a material increase in debt levels exceeding the available line of credit amount. As a result, we expect changes in our debt-to-total-capital ratio to continue to be largely a function of the contribution of unrealized investment gains or losses to shareholders’ equity. As part of our MSP acquisition, on February 25, 2019, we entered into an unsecured letter of credit agreement in the amount of $238 million to provide a portion of the capital needed to support its obligations at Lloyd’s.
We provide details of our three long-term notes in this quarterly report Item 1, Note 3 – Fair Value Measurements. None of the notes are encumbered by rating triggers.
Four independent ratings firms award insurer financial strength ratings to our property casualty insurance companies and three firms rate our life insurance company. Those firms made no changes to our parent company debt ratings during the first three months of 2019. Our debt ratings are discussed in our 2018 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, Other Sources of Liquidity, Page 95.
Off-Balance Sheet Arrangements
We do not use any special-purpose financing vehicles or have any undisclosed off-balance sheet arrangements (as that term is defined in 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. Similarly, the company holds no fair-value contracts for which a lack of marketplace quotations would necessitate the use of fair-value techniques.
USES OF LIQUIDITY
Our parent company and insurance subsidiary have contractual obligations and other commitments. In addition, one of our primary uses of cash is to enhance shareholder return.
Contractual Obligations
We estimated our future contractual obligations as of December 31, 2018, in our 2018 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 97. There have been no material changes to our estimates of future contractual obligations since our 2018 Annual Report on Form 10-K.
Other Commitments
In addition to our contractual obligations, we have other property casualty operational commitments.
|
|
|
|
•
|
Commissions – Commissions paid were $350 million in the first three months of 2019. Commission payments generally track with written premiums, except for annual profit-sharing commissions typically paid during the first quarter of the year.
|
|
|
|
|
•
|
Other underwriting expenses – Many of our underwriting expenses are not contractual obligations, but reflect the ongoing expenses of our business. Noncommission underwriting expenses paid were $164 million in the first three months of 2019.
|
|
|
|
|
•
|
Technology costs – In addition to contractual obligations for hardware and software, we anticipate capitalizing up to $7 million in spending for key technology initiatives in 2019. Capitalized development costs related to key technology initiatives were $2 million in the first three months of 2019. These activities are conducted at our discretion, and we have no material contractual obligations for activities planned as part of these projects.
|
|
|
|
|
•
|
Funds at Lloyd's – From time to time, we may be required to meet certain cash funding requirements on behalf of MSP. In March, 2019, we paid $35 million to Lloyd’s.
|
There were no contributions to our qualified pension plan during the first three months of 2019.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
59
Investing Activities
After fulfilling operating requirements, we invest cash flows from underwriting, investment and other corporate activities in fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We discuss our investment strategy and certain portfolio attributes in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk.
Uses of Capital
Uses of cash to enhance shareholder return include dividends to shareholders. In February 2019, the board of directors declared regular quarterly cash dividends of 56 cents per share for an indicated annual rate of $2.24 per share. During the first three months of 2019, we used $85 million to pay cash dividends to shareholders.
PROPERTY CASUALTY INSURANCE LOSS AND LOSS EXPENSE RESERVES
For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines insurance segment and other property casualty insurance operations, the following table details gross reserves among case, IBNR (incurred but not reported) and loss expense reserves, net of salvage and subrogation reserves. Reserving practices are discussed in our 2018 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves, Page 98.
Total gross reserves at March 31, 2019, increased $240 million compared with December 31, 2018. Case loss reserves for losses increased $124 million, IBNR loss reserves increased by $119 million and loss expense reserves decreased by $3 million. The total gross increase was driven by the inclusion of reserves for recently-acquired MSP.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
60
Property Casualty Gross Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Loss reserves
|
|
Loss expense reserves
|
|
Total gross reserves
|
|
|
|
|
|
Case reserves
|
|
IBNR reserves
|
|
|
|
Percent of total
|
|
At March 31, 2019
|
|
|
|
|
|
|
Commercial lines insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial casualty
|
|
$
|
918
|
|
|
$
|
660
|
|
|
$
|
606
|
|
|
$
|
2,184
|
|
|
37.1
|
%
|
|
Commercial property
|
|
248
|
|
|
32
|
|
|
60
|
|
|
340
|
|
|
5.8
|
|
|
Commercial auto
|
|
392
|
|
|
164
|
|
|
135
|
|
|
691
|
|
|
11.7
|
|
|
Workers' compensation
|
|
385
|
|
|
541
|
|
|
93
|
|
|
1,019
|
|
|
17.3
|
|
|
Other commercial
|
|
101
|
|
|
7
|
|
|
72
|
|
|
180
|
|
|
3.1
|
|
|
Subtotal
|
|
2,044
|
|
|
1,404
|
|
|
966
|
|
|
4,414
|
|
|
75.0
|
|
|
Personal lines insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal auto
|
|
228
|
|
|
60
|
|
|
73
|
|
|
361
|
|
|
6.1
|
|
|
Homeowner
|
|
164
|
|
|
24
|
|
|
34
|
|
|
222
|
|
|
3.8
|
|
|
Other personal
|
|
49
|
|
|
57
|
|
|
5
|
|
|
111
|
|
|
1.9
|
|
|
Subtotal
|
|
441
|
|
|
141
|
|
|
112
|
|
|
694
|
|
|
11.8
|
|
|
Excess and surplus lines insurance
|
|
119
|
|
|
96
|
|
|
88
|
|
|
303
|
|
|
5.1
|
|
|
Cincinnati Re
|
|
46
|
|
|
162
|
|
|
2
|
|
|
210
|
|
|
3.6
|
|
|
MSP
|
|
198
|
|
|
65
|
|
|
2
|
|
|
265
|
|
|
4.5
|
|
|
Total
|
|
$
|
2,848
|
|
|
$
|
1,868
|
|
|
$
|
1,170
|
|
|
$
|
5,886
|
|
|
100.0
|
%
|
|
At December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial casualty
|
|
$
|
981
|
|
|
$
|
647
|
|
|
$
|
604
|
|
|
$
|
2,232
|
|
|
39.5
|
%
|
|
Commercial property
|
|
270
|
|
|
12
|
|
|
60
|
|
|
342
|
|
|
6.1
|
|
|
Commercial auto
|
|
402
|
|
|
152
|
|
|
141
|
|
|
695
|
|
|
12.3
|
|
|
Workers' compensation
|
|
384
|
|
|
542
|
|
|
92
|
|
|
1,018
|
|
|
18.0
|
|
|
Other commercial
|
|
99
|
|
|
7
|
|
|
73
|
|
|
179
|
|
|
3.2
|
|
|
Subtotal
|
|
2,136
|
|
|
1,360
|
|
|
970
|
|
|
4,466
|
|
|
79.1
|
|
|
Personal lines insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal auto
|
|
240
|
|
|
50
|
|
|
72
|
|
|
362
|
|
|
6.3
|
|
|
Homeowner
|
|
152
|
|
|
9
|
|
|
40
|
|
|
201
|
|
|
3.6
|
|
|
Other personal
|
|
46
|
|
|
65
|
|
|
5
|
|
|
116
|
|
|
2.1
|
|
|
Subtotal
|
|
438
|
|
|
124
|
|
|
117
|
|
|
679
|
|
|
12.0
|
|
|
Excess and surplus lines insurance
|
|
118
|
|
|
96
|
|
|
84
|
|
|
298
|
|
|
5.3
|
|
|
Cincinnati Re
|
|
32
|
|
|
169
|
|
|
2
|
|
|
203
|
|
|
3.6
|
|
|
Total
|
|
$
|
2,724
|
|
|
$
|
1,749
|
|
|
$
|
1,173
|
|
|
$
|
5,646
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
LIFE POLICY AND INVESTMENT CONTRACT RESERVES
Gross life policy and investment contract reserves were $2.784 billion at March 31, 2019, compared with $2.779 billion at year-end 2018, reflecting continued growth in life insurance policies in force. We discuss our life insurance reserving practices in our 2018 Annual Report on Form 10-K, Item 7, Life Insurance Policyholder Obligations and Reserves, Page 104.
Cincinnati Financial Corporation First-Quarter 2019 10-Q
Page
61
OTHER MATTERS
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are discussed in our 2018 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 128, and updated in this quarterly report Item 1, Note 1, Accounting Policies.
In conjunction with those discussions, in the Management’s Discussion and Analysis in the 2018 Annual Report on Form 10-K, management reviewed the estimates and assumptions used to develop reported amounts related to the most significant policies. Management discussed the development and selection of those accounting estimates with the audit committee of the board of directors.