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, 2020						14.7		%				15.0		%				16.5		%
As of December 31, 2019						30.5						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,																		2020-2019						2019-2018
						2020						2019						2018						Pt. Change						Pt. Change
Value creation ratio major components:
Net income before investment gains						5.5		%				8.9		%				7.4		%				(3.4)						1.5
Change in fixed-maturity securities, realized and unrealized gains						3.0						5.5						(3.2)						(2.5)						8.7
Change in equity securities, investment gains						7.5						16.6						(3.8)						(9.1)						20.4
Other						(1.3)						(0.5)						(0.5)						(0.8)						0.0
Value creation ratio						14.7		%				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,
						2020						2019						2018
Value creation ratio:
End of period book value*						$	67.04					$	60.55					$	48.10
Less beginning of period book value						60.55						48.10						50.29
Change in book value						6.49						12.45						(2.19)
Dividend declared to shareholders						2.40						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 ratio						14.7		%				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,
						2020						2019
Total investments						$	21,542					$	19,746
Total assets						27,542						25,408
Short-term debt						54						39
Long-term debt						788						788
Shareholders' equity						10,789						9,864
Book value per share						67.04						60.55
Debt-to-total-capital ratio						7.2		%				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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Earned premiums						$	5,980					$	5,604					$	5,170					7						8
Investment income, net of expenses (pretax)						670						646						619						4						4
Investment gains and losses, net (pretax)						865						1,650						(402)						(48)						nm
Total revenues						7,536						7,924						5,407						(5)						47
Net income						1,216						1,997						287						(39)						596
Comprehensive income						1,537						2,423						24						(37)						nm
Net income per share - diluted						7.49						12.10						1.75						(38)						591
Cash dividends declared per share						2.40						2.24						2.12						7						6
Diluted weighted average shares outstanding						162.4						165.1						164.5						(2)						0

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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Consolidated property casualty data:
Net written premiums						$	5,864					$	5,516					$	5,030					6						10
Earned premiums						5,691						5,334						4,920						7						8
Underwriting profit						119						341						186						(65)						83
																								Pt. Change						Pt. Change
GAAP combined ratio						98.1		%				93.8		%				96.4		%				4.3						(2.6)
Statutory combined ratio						96.7						93.4						96.0						3.3						(2.6)
Written premium to statutory surplus						1.0						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 reserves						Low point						High point						Standard error						Net 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 property						468						381						476						48						38
Commercial auto						736						694						767						37						29
Workers' compensation						964						803						979						88						70
Personal auto						298						280						316						18						14
Homeowners						236						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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Earned premiums						$	5,691					$	5,334					$	4,920					7						8
Fee revenues						9						11						11						(18)						0
Total revenues						5,700						5,345						4,931						7						8
Loss and loss expenses from:
Current accident year before catastrophe losses						3,243						3,249						3,026						0						7
Current accident year catastrophe losses						725						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 expenses						3,837						3,352						3,223						14						4
Underwriting expenses						1,744						1,652						1,522						6						9
Underwriting profit						$	119					$	341					$	186					(65)						83
Ratios as a percent of earned premiums:																								Pt. Change						Pt. Change
Current accident year before catastrophe losses						57.0		%				60.9		%				61.5		%				(3.9)						(0.6)
Current accident year catastrophe losses						12.7						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 expenses						67.4						62.8						65.5						4.6						(2.7)
Underwriting expenses						30.7						31.0						30.9						(0.3)						0.1
Combined ratio						98.1		%				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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Agency renewal written premiums						$	4,740					$	4,519					$	4,358					5						4
Agency new business written premiums						799						778						652						3						19
Other written premiums						325						219						20						48						nm
Net written premiums						5,864						5,516						5,030						6						10
Unearned premium change						(173)						(182)						(110)						5						(65)
Earned premiums						$	5,691					$	5,334					$	4,920					7						8

• 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 lines						Personal lines
Dates			Events			Regions															Other						Total
2020
Jan. 10-12			Flood, hail, wind			Midwest, Northeast, South						$	6					$	4					$	—					$	—					$	10
Feb. 5-8			Flood, hail, wind			Northeast, South						9						5						—						—						14
Mar. 2-4			Flood, hail, wind			Midwest, South						58						8						—						5						71
Mar. 27-30			Flood, hail, wind			Midwest, Northeast, South						21						14						—						—						35
Apr. 7-9			Flood, hail, wind			Midwest, Northeast, South						29						29						—						—						58
Apr. 10-14			Flood, hail, wind			Midwest, Northeast, South						22						27						—						1						50
May 4-5			Flood, hail, wind			Midwest, South						22						5						—						—						27
May 26 - Jun. 8			Civil unrest			Midwest, Northeast, South, West						16						—						1						5						22
Jul. 10-12			Flood, hail, wind			Midwest, South						15						13						—						—						28
Jul. 30 - Aug. 5			Flood, hail, wind			International, South, Northeast						6						19						—						1						26
Aug. 8-11			Flood, hail, wind			Midwest						84						20						1						—						105
Aug. 26-28			Flood, hail, wind			South (Laura)						2						2						—						41						45
Sep. 7-16			Wildfire			West						9						4						—						—						13
Sep. 14-18			Flood, hail, wind			South (Sally)						8						4						—						25						37
Oct. 9-12			Flood, hail, wind			South (Delta)						—						1						—						14						15
Oct. 28-29			Flood, hail, wind			South (Zeta)						7						15						—						9						31
Nov. 15-16			Flood, hail, wind			Midwest, Northeast, South						4						6						—						—						10
Dec. 25			Explosion			South						20						—						—						—						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. 1			Flood, ice, snow, wind			Midwest, Northeast						$	9					$	10					$	—					$	—					$	19
Feb. 23-26			Flood, freezing, hail, ice, snow, wind			Midwest, Northeast, South						10						9						—						—						19
Mar. 12-17			Flood, hail, ice, snow, wind			Midwest, Northeast, West, South						4						4						—						4						12
May 16-17			Flood, hail, wind			Midwest						8						5						—						—						13
May 26 - 28			Flood, hail, wind			Midwest, Northeast, West, South						71						29						—						—						100
Aug. 4-5			Flood, hail, wind			Midwest						4						8						—						—						12
Aug. 10-11			Flood, hail, wind			West						22						1						—						—						23
Aug. 28 - Sep. 6			Flood, hail, wind			South, International (Dorian)						3						1						—						11						15
Oct. 7-20			Typhoon			International (Hagibis)						—						—						—						12						12
Oct. 20-21			Flood, hail, wind			Midwest, South						4						23						—						—						27
All other 2019 catastrophes												41						47						1						10						99
Development on 2018 and prior catastrophes												(25)						2						—						(6)						(29)
Calendar year incurred total												$	151					$	139					$	1					$	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:						2020						2019						2018						2020						2019						2018
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.

Cincinnati Financial Corporation - 2020 10-K - Page 69

Consolidated Property Casualty Insurance Losses by Size

(Dollars in millions, net of reinsurance)						Years ended December 31,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Current accident year losses greater than $5,000,000						$	50					$	27					$	43					85						(37)
Current accident year losses $1,000,000-$5,000,000						202						243						218						(17)						11
Large loss prior accident year reserve development						42						50						69						(16)						(28)
Total large losses incurred						294						320						330						(8)						(3)
Losses incurred but not reported						310						50						110						nm						(55)
Other losses excluding catastrophe losses						1,909						2,118						1,886						(10)						12
Catastrophe losses						670						309						334						117						(7)
Total losses incurred						$	3,183					$	2,797					$	2,660					14						5
Ratios as a percent of earned premiums:																								Pt. Change						Pt. Change
Current accident year losses greater than $5,000,000						0.9		%				0.5		%				0.9		%				0.4						(0.4)
Current accident year losses $1,000,000-$5,000,000						3.6						4.6						4.4						(1.0)						0.2
Large loss prior accident year reserve development						0.7						0.9						1.4						(0.2)						(0.5)
Total large loss ratio						5.2						6.0						6.7						(0.8)						(0.7)
Losses incurred but not reported						5.5						0.9						2.2						4.6						(1.3)
Other losses excluding catastrophe losses						33.4						39.7						38.4						(6.3)						1.3
Catastrophe losses						11.8						5.8						6.8						6.0						(1.0)
Total loss ratio						55.9		%				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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Commission expenses						$	1,042					$	989					$	911					5						9
Other underwriting expenses						692						651						599						6						9
Policyholder dividends						10						12						12						(17)						0
Total underwriting expenses						$	1,744					$	1,652					$	1,522					6						9
Ratios as a percent of earned premiums:																								Pt. Change						Pt. Change
Commission expenses						18.3		%				18.6		%				18.5		%				(0.3)						0.1
Other underwriting expenses						12.2						12.2						12.1						0.0						0.1
Policyholder dividends						0.2						0.2						0.3						0.0						(0.1)
Total underwriting expense ratio						30.7		%				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.

Cincinnati Financial Corporation - 2020 10-K - Page 71

Commercial Lines Insurance Results

Overview – Three-Year Highlights

(Dollars in millions)						Years ended December 31,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Earned premiums						$	3,476					$	3,319					$	3,218					5						3
Fee revenues						3						5						5						(40)						0
Total revenues						3,479						3,324						3,223						5						3
Loss and loss expenses from:
Current accident year before catastrophe losses						2,055						2,046						1,998						0						2
Current accident year catastrophe losses						376						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 expenses						2,336						2,030						2,049						15						(1)
Underwriting expenses						1,079						1,053						1,023						2						3
Underwriting profit						$	64					$	241					$	151					(73)						60
Ratios as a percent of earned premiums:																								Pt. Change						Pt. Change
Current accident year before catastrophe losses						59.2		%				61.7		%				62.1		%				(2.5)						(0.4)
Current accident year catastrophe losses						10.8						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 expenses						67.3						61.2						63.7						6.1						(2.5)
Underwriting expenses						31.0						31.7						31.7						(0.7)						0.0
Combined ratio						98.3		%				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.

Cincinnati Financial Corporation - 2020 10-K - Page 72

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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Agency renewal written premiums						$	3,122					$	2,998					$	2,925					4						2
Agency new business written premiums						515						510						417						1						22
Other written premiums						(103)						(98)						(97)						(5)						(1)
Net written premiums						3,534						3,410						3,245						4						5
Unearned premium change						(58)						(91)						(27)						36						(237)
Earned premiums						$	3,476					$	3,319					$	3,218					5						3

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.

Cincinnati Financial Corporation - 2020 10-K - Page 73

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.

Cincinnati Financial Corporation - 2020 10-K - Page 74

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:						2020						2019						2018						2020						2019						2018
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.

Cincinnati Financial Corporation - 2020 10-K - Page 75

Commercial Lines Insurance Losses by Size

(Dollars in millions, net of reinsurance)						Years ended December 31,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Current accident year losses greater than $5,000,000						$	50					$	27					$	37					85						(27)
Current accident year losses $1,000,000-$5,000,000						135						185						182						(27)						2
Large loss prior accident year reserve development						36						49						65						(27)						(25)
Total large losses incurred						221						261						284						(15)						(8)
Losses incurred but not reported						240						26						64						nm						(59)
Other losses excluding catastrophe losses						1,073						1,222						1,122						(12)						9
Catastrophe losses						350						142						180						146						(21)
Total losses incurred						$	1,884					$	1,651					$	1,650					14						0
Ratios as a percent of earned premiums:																								Pt. Change						Pt. Change
Current accident year losses greater than $5,000,000						1.4		%				0.8		%				1.2		%				0.6						(0.4)
Current accident year losses $1,000,000-$5,000,000						4.0						5.6						5.6						(1.6)						0.0
Large loss prior accident year reserve development						1.0						1.5						2.0						(0.5)						(0.5)
Total large loss ratio						6.4						7.9						8.8						(1.5)						(0.9)
Losses incurred but not reported						6.9						0.8						2.0						6.1						(1.2)
Other losses excluding catastrophe losses						30.8						36.7						34.9						(5.9)						1.8
Catastrophe losses						10.1						4.3						5.6						5.8						(1.3)
Total loss ratio						54.2		%				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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Commission expenses						$	625					$	614					$	592					2						4
Other underwriting expenses						444						427						419						4						2
Policyholder dividends						10						12						12						(17)						0
Total underwriting expenses						$	1,079					$	1,053					$	1,023					2						3
Ratios as a percent of earned premiums:																								Pt. Change						Pt. Change
Commission expenses						18.0		%				18.5		%				18.4		%				(0.5)						0.1
Other underwriting expenses						12.7						12.9						12.9						(0.2)						0.0
Policyholder dividends						0.3						0.3						0.4						0.0						(0.1)
Total underwriting expense ratio						31.0		%				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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Earned premiums						$	1,463					$	1,404					$	1,336					4						5
Fee revenues						4						4						5						0						(20)
Total revenues						1,467						1,408						1,341						4						5
Loss and loss expenses from:
Current accident year before catastrophe losses						762						875						838						(13)						4
Current accident year catastrophe losses						233						137						121						70						13
Prior accident years before catastrophe losses						(10)						(29)						9						66						nm
Prior accident years catastrophe losses						(8)						2						4						nm						(50)
Loss and loss expenses						977						985						972						(1)						1
Underwriting expenses						443						415						389						7						7
Underwriting profit (loss)						$	47					$	8					$	(20)					488						nm
Ratios as a percent of earned premiums:																								Pt. Change						Pt. Change
Current accident year before catastrophe losses						52.1		%				62.4		%				62.8		%				(10.3)						(0.4)
Current accident year catastrophe losses						16.0						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 expenses						66.8						70.2						72.8						(3.4)						(2.6)
Underwriting expenses						30.3						29.6						29.1						0.7						0.5
Combined ratio						97.1		%				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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Agency renewal written premiums						$	1,364					$	1,312					$	1,241					4						6
Agency new business written premiums						174						158						165						10						(4)
Other written premiums						(35)						(35)						(28)						0						(25)
Net written premiums						1,503						1,435						1,378						5						4
Unearned premium change						(40)						(31)						(42)						(29)						26
Earned premiums						$	1,463					$	1,404					$	1,336					4						5

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:						2020						2019						2018						2020						2019						2018
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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Current accident year losses greater than $5,000,000						$	—					$	—					$	6					nm						(100)
Current accident year losses $1,000,000-$5,000,000						59						51						32						16						59
Large loss prior accident year reserve development						6						(1)						4						nm						nm
Total large losses incurred						65						50						42						30						19
Losses incurred but not reported						39						17						38						129						(55)
Other losses excluding catastrophe losses						523						662						650						(21)						2
Catastrophe losses						216						135						122						60						11
Total losses incurred						$	843					$	864					$	852					(2)						1
Ratios as a percent of earned premiums:																								Pt. Change						Pt. Change
Current accident year losses greater than $5,000,000						0.0		%				0.0		%				0.4		%				0.0						(0.4)
Current accident year losses $1,000,000-$5,000,000						4.0						3.6						2.4						0.4						1.2
Large loss prior accident year reserve development						0.4						(0.1)						0.4						0.5						(0.5)
Total large loss ratio						4.4						3.5						3.2						0.9						0.3
Losses incurred but not reported						2.7						1.2						2.8						1.5						(1.6)
Other losses excluding catastrophe losses						35.8						47.2						48.7						(11.4)						(1.5)
Catastrophe losses						14.7						9.6						9.1						5.1						0.5
Total loss ratio						57.6		%				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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Commission expenses						$	266					$	259					$	243					3						7
Other underwriting expenses						177						156						146						13						7
Total underwriting expenses						$	443					$	415					$	389					7						7
Ratios as a percent of earned premiums:																								Pt. Change						Pt. Change
Commission expenses						18.2		%				18.5		%				18.2		%				(0.3)						0.3
Other underwriting expenses						12.1						11.1						10.9						1.0						0.2
Total underwriting expense ratio						30.3		%				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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Earned premiums						$	325					$	278					$	234					17						19
Fee revenues						2						2						1						0						100
Total revenues						327						280						235						17						19
Loss and loss expenses from:
Current accident year before catastrophe losses						187						152						126						23						21
Current accident year catastrophe losses						5						1						2						400						(50)
Prior accident years before catastrophe losses						7						(11)						(24)						nm						54
Prior accident years catastrophe losses						—						—						—						0						0
Loss and loss expenses						199						142						104						40						37
Underwriting expenses						94						85						68						11						25
Underwriting profit						$	34					$	53					$	63					(36)						(16)
Ratios as a percent of earned premiums:																								Pt. Change						Pt. Change
Current accident year before catastrophe losses						57.7		%				54.6		%				53.9		%				3.1						0.7
Current accident year catastrophe losses						1.3						0.4						1.1						0.9						(0.7)
Prior accident years before catastrophe losses						2.1						(4.1)						(10.6)						6.2						6.5
Prior accident years catastrophe losses						0.2						0.2						0.0						0.0						0.2
Loss and loss expenses						61.3						51.1						44.4						10.2						6.7
Underwriting expenses						28.7						30.4						29.1						(1.7)						1.3
Combined ratio						90.0		%				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

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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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Agency renewal written premiums						$	254					$	209					$	192					22						9
Agency new business written premiums						110						110						70						0						57
Other written premiums						(16)						(16)						(13)						0						(23)
Net written premiums						348						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:						2020						2019						2018						2020						2019						2018
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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Current accident year losses greater than $5,000,000						$	—					$	—					$	—					nm						nm
Current accident year losses $1,000,000-$5,000,000						8						7						4						14						75
Large loss prior accident year reserve development						—						2						—						(100)						nm
Total large losses incurred						8						9						4						(11)						125
Losses incurred but not reported						31						7						8						343						(13)
Other losses excluding catastrophe losses						95						76						50						25						52
Catastrophe losses						5						2						2						150						0
Total losses incurred						$	139					$	94					$	64					48						47
Ratios as a percent of earned premiums:																								Pt. Change						Pt. Change
Current accident year losses greater than $5,000,000						0.0		%				0.0		%				0.0		%				0.0						0.0
Current accident year losses $1,000,000-$5,000,000						2.5						2.5						1.8						0.0						0.7
Large loss prior accident year reserve development						0.0						0.6						(0.1)						(0.6)						0.7
Total large loss ratio						2.5						3.1						1.7						(0.6)						1.4
Losses incurred but not reported						9.5						2.4						3.6						7.1						(1.2)
Other losses excluding catastrophe losses						29.3						27.7						21.1						1.6						6.6
Catastrophe losses						1.4						0.5						1.0						0.9						(0.5)
Total loss ratio						42.7		%				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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Commission expenses						$	58					$	53					$	45					9						18
Other underwriting expenses						36						32						23						13						39
Total underwriting expenses						$	94					$	85					$	68					11						25
Ratios as a percent of earned premiums:																								Pt. Change						Pt. Change
Commission expenses						17.6		%				18.9		%				19.3		%				(1.3)						(0.4)
Other underwriting expenses						11.1						11.5						9.8						(0.4)						1.7
Total underwriting expenses ratio						28.7		%				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.

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Life Insurance Results

Overview – Three-Year Highlights

(Dollars in millions)						Years ended December 31,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Earned premiums						$	289					$	270					$	250					7						8
Fee revenues						2						4						4						(50)						0
Total revenues						291						274						254						6						8
Contract holders' benefits incurred						297						286						267						4						7
Investment interest credited to contract holders						(102)						(99)						(96)						(3)						(3)
Underwriting expenses incurred						85						86						75						(1)						15
Total benefits and expenses						280						273						246						3						11
Life insurance segment profit						$	11					$	1					$	8					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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Term life insurance						$	197					$	186					$	172					6						8
Universal life insurance						44						39						37						13						5
Other life insurance and annuity products						48						45						41						7						10
Net earned premiums						$	289					$	270					$	250					7						8

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.

Cincinnati Financial Corporation - 2020 10-K - Page 87

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.

Cincinnati Financial Corporation - 2020 10-K - Page 89

Investments Results

Overview – Three-Year Highlights

Investments Results

(Dollars in millions)						Years ended December 31,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Total investment income, net of expenses						$	670					$	646					$	619					4						4
Investment interest credited to contract holders						(102)						(99)						(96)						(3)						(3)
Investment gains and losses, net						865						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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Invested assets beginning balance:
Fixed maturities						$	11,698					$	10,689					$	10,699					9						0
Equity securities						7,752						5,920						6,249						31						(5)
Other invested assets						296						123						103						141						19
Invested assets beginning balance						19,746						16,732						17,051						18						(2)
Average acquisitions (dispositions), net						309						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						4
Investment gains and losses, net						865						1,650						(402)						(48)						nm
Total invested assets change in unrealized gains and losses						436						544						(339)						(20)						nm
Total						$	1,971					$	2,840					$	(122)					(31)						nm
Total return on invested assets, pretax						9.8		%				16.6		%				(0.7)		%

Cincinnati Financial Corporation - 2020 10-K - Page 91

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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Investment income:
Interest						$	455					$	446					$	445					2						0
Dividends						220						201						181						9						11
Other						8						12						5						(33)						140
Less investment expenses						13						13						12						0						8
Investment income, pretax						670						646						619						4						4
Less income taxes						104						101						95						3						6
Total investment income, after-tax						$	566					$	545					$	524					4						4
Investment returns:
Average invested assets plus cash and cash equivalents						$	20,670					$	18,697					$	17,397
Average yield pretax						3.24		%				3.46		%				3.56		%
Average yield after-tax						2.74						2.91						3.01
Effective tax rate						15.5						15.6						15.4
Fixed-maturity returns:
Average amortized cost						$	11,210					$	10,876					$	10,479
Average yield pretax						4.06		%				4.10		%				4.25		%
Average yield after-tax						3.39						3.42						3.55
Effective tax rate						16.6						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			% Yield						Principal redemptions
Fixed-maturity yield profile:
Expected to mature during 2021			4.37		%				$	835
Expected to mature during 2022			3.93						935
Expected to mature during 2023			4.26						969
Average yield and total expected redemptions from 2021 through 2023			4.18						$	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,
						2020						2019
Average pretax yield-to-amortized cost on new fixed maturities:
Acquired taxable fixed maturities						4.23		%				4.31		%
Acquired tax-exempt fixed maturities						2.71						3.31
Average total fixed maturities acquired						3.97						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.

Cincinnati Financial Corporation - 2020 10-K - Page 93

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,
						2020						2019						2018
Investment gains and losses
Equity securities:
Investment gains and losses on securities sold, net						$	79					$	26					$	9
Unrealized gains and losses on securities still held, net						841						1,626						(404)
Subtotal						920						1,652						(395)
Fixed-maturity securities:
Gross realized gains						16						13						12
Gross realized losses						(3)						(3)						(2)
Write-down of impaired securities						(78)						(9)						(5)
Subtotal						(65)						1						5
Other						10						(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 securities						436						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,
						2020						2019						2018
Taxable fixed maturities:
Impairment amount						$	77					$	9					$	5
New amortized cost						$	78					$	20					$	8
Percent to total amortized cost owned						1		%				—		%				—		%
Number of impaired securities written down						13						3						1
Percent to number of securities owned						2		%				—		%				—		%
Tax-exempt fixed maturities:
Impairment amount						$	1					$	—					$	—
New amortized cost						$	1					$	—					$	—
Percent to total amortized cost owned						—		%				—		%				—		%
Number of impaired securities written down						1						—						—
Percent to number of securities owned						—		%				—		%				—		%
Totals:
Impairment amount						$	78					$	9					$	5
New amortized cost						$	79					$	20					$	8
Percent to total amortized cost owned						1		%				—		%				—		%
Number of impaired securities written down						14						3						1
Percent to number of securities owned						1		%				—		%				—		%

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,
						2020						2019						2018
Fixed maturities:
Energy						$	62					$	6					$	5
Real estate						13						3						—
Consumer goods						1						—						—
Municipal						1						—						—
Technology & Electronics						1						—						—
Total fixed maturities						$	78					$	9					$	5

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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,																		2020-2019						2019-2018
						2020						2019						2018						Change %						Change %
Interest and fees on loans and leases						$	6					$	5					$	4					20						25
Earned premiums						427						333						132						28						152
Other revenues						4						4						1						0						300
Total revenues						437						342						137						28						150
Interest expense						54						53						53						2						0
Loss and loss expenses						325						195						98						67						99
Underwriting expenses						128						99						42						29						136
Operating expenses						20						23						16						(13)						44
Total expenses						527						370						209						42						77
Other loss						$	(90)					$	(28)					$	(72)					(221)						61

Cincinnati Financial Corporation - 2020 10-K - Page 97

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,
						2020						2019						2018
Sources of liquidity:
Insurance subsidiary dividends received						$	550					$	625					$	500
Investment income received						81						75						65
Proceeds from stock options exercised						7						11						9
Uses of liquidity:
Shareholders' dividend payments						$	375					$	355					$	336
Share repurchases						261						67						125
Debt interest payments						54						52						52
Deposits at Lloyd's, net						42						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,
						2020						2019						2018
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 underwriting						860						596						632
Investment income received						456						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

Cincinnati Financial Corporation - 2020 10-K - Page 101

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)						Year						Years						Years						There-
Payment due by period						2021						2022-2023						2024-2025						after						Total
Gross property casualty loss and loss expense payments						$	2,368					$	2,425					$	899					$	985					$	6,677
Gross life policyholder obligations						93						132						200						5,389						5,814
Interest on long-term debt						52						104						104						267						527
Long-term debt						—						—						—						793						793
Short-term debt						54						—						—						—						54
Profit-sharing commissions						142						—						—						—						142
Finance lease obligations						15						22						10						2						49
Operating lease obligations						2						4						3						2						11
Other liabilities						117						14						7						5						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.

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Property Casualty Gross Loss and Loss Expense Reserves

(Dollars in millions)						Loss reserves												Loss expense reserves						Total gross reserves
						Case reserves						IBNR reserves												Percent of total
At December 31, 2020
Commercial lines insurance:
Commercial casualty						$	955					$	764					$	653					$	2,372					35.5		%
Commercial property						338						127						69						534						8.0
Commercial auto						391						209						141						741						11.1
Workers' compensation						402						534						89						1,025						15.4
Other commercial						92						13						104						209						3.1
Subtotal						2,178						1,647						1,056						4,881						73.1
Personal lines insurance:
Personal auto						205						56						68						329						4.9
Homeowner						166						47						41						254						3.8
Other personal						61						90						5						156						2.3
Subtotal						432						193						114						739						11.0
Excess and surplus lines						190						133						123						446						6.7
Cincinnati Re						77						287						2						366						5.5
Cincinnati Global						147						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 property						339						20						64						423						7.0
Commercial auto						409						157						143						709						11.6
Workers' compensation						404						516						93						1,013						16.6
Other commercial						108						7						70						185						3.0
Subtotal						2,197						1,380						992						4,569						75.0
Personal lines insurance:
Personal auto						233						46						78						357						5.9
Homeowner						134						32						41						207						3.4
Other personal						49						69						5						123						2.0
Subtotal						416						147						124						687						11.3
Excess and surplus lines						149						102						100						351						5.8
Cincinnati Re						47						204						2						253						4.2
Cincinnati Global						155						71						2						228						3.7
Total						$	2,964					$	1,904					$	1,220					$	6,088					100.0		%

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Asbestos and Environmental Loss and Loss Expense Reserves

We carried $85 million of net loss and loss expense reserves for asbestos and environmental claims and $43 million of reserves for mold claims at year-end 2020, compared with $85 million and $43 million, respectively, for such claims at year-end 2019. The asbestos and environmental claims amounts for each respective year constituted 1.3% and 1.5% of total net loss and loss expense reserves at these year-end dates.

We believe our exposure to asbestos and environmental claims is limited, largely because our reinsurance retention was $500,000 or below prior to 1987. We also were predominantly a personal lines company in the 1960s and 1970s, when asbestos and pollution exclusions were not widely used by commercial lines insurers. During the 1980s and early 1990s, commercial lines grew as a percentage of our overall business and our exposure to asbestos and environmental claims grew accordingly. Over that period, we endorsed to or included in most policies an asbestos and environmental exclusion.

Additionally, since 2002, we have revised policy terms where permitted by state regulation to limit our exposure to mold claims prospectively and further reduce our exposure to other environmental claims generally. Finally, we have not engaged in any mergers or acquisitions through which such a liability could have been assumed. We continue to monitor our claims for evidence of material exposure to other mass tort classes, but we have found no such credible evidence to date.

Reserving data for asbestos and environmental claims has characteristics that limit the usefulness of the methods and models used to analyze loss and loss expense reserves for other claims. Specifically, asbestos and environmental loss and loss expenses for different accident years do not emerge independently of one another as loss development and Bornhuetter-Ferguson methods assume. In addition, asbestos and environmental loss and loss expense data available to date did not reflect a well-defined tail, greatly complicating the identification of an appropriate probabilistic trend family model. At year-end 2020, we used a weighted average of a paid survival ratio method and report year method to estimate reserves for IBNR asbestos and environmental claims. Our exposure to such claims is limited; we believe a weighted average of both methods produces a sufficient level of reserves.

Gross Property Casualty Loss and Loss Expense Payments

While we believe that historical performance of property casualty and life loss payment patterns is a reasonable source for projecting future claim payments, there is inherent uncertainty in this estimate of contractual obligations. We believe that we could meet our obligations under a significant and unexpected change in the timing of these payments because of the liquidity of our invested assets, strong financial position and access to lines of credit.

Our estimates of gross property casualty loss and loss expense payments do not include reinsurance receivables or ceded losses. As discussed in 2021 Reinsurance Ceded Programs, we purchase reinsurance to mitigate our property casualty risk exposure. Ceded property casualty reinsurance unpaid receivables of $277 million at year-end 2020 are an offset to our gross property casualty loss and loss expense obligations. Our reinsurance program mitigates the liquidity risk of a single large loss or an unexpected rise in claim severity or frequency due to a catastrophic event. Reinsurance does not relieve us of our obligation to pay covered claims. The financial strength of our reinsurers is important because our ability to recover losses under our reinsurance agreements depends on the financial viability of the reinsurers.

We direct our associates and agencies to settle claims and pay losses as quickly as is practical, and we made $3.183 billion of net claim payments during 2020. At year-end 2020, total net property casualty reserves of $6.400 billion reflected $2.833 billion in unpaid amounts on reported claims (case reserves), $1.284 billion in loss expense reserves and $2.283 billion in estimates of claims that were incurred but had not yet been reported (IBNR). The specific amounts and timing of obligations related to case reserves and associated loss expenses are not set contractually. The amounts and timing of obligations for IBNR claims and related loss expenses are unknown. We discuss our methods of establishing loss and loss expense reserves and our belief that reserves are adequate in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves.

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The historical pattern of using premium receipts for the payment of loss and loss expenses has enabled us to extend slightly the maturities of our investment portfolio beyond the estimated settlement date of the loss reserves. The effective duration of our consolidated property casualty fixed-maturity portfolio was 4.3 years at year-end 2020. By contrast, the duration of our loss and loss expense reserves was approximately 3.4 years. We believe this difference in duration does not affect our ability to meet current obligations because cash flow from operations is sufficient to meet these obligations. In addition, investment holdings could be sold, if necessary, to meet higher than anticipated loss and loss expenses.

Range of Reasonable Reserves

The company established a reasonably likely range for net loss and loss expense reserves of $5.859 billion to $6.543 billion at year-end 2020, with the company carrying net reserves of $6.400 billion. The range was $5.418 billion to $5.862 billion at year-end 2019, with the company carrying net reserves of $5.746 billion. Our loss and loss expense reserves are not discounted for the time-value of money, but we have reduced the reserves by an estimate of the amount of salvage and subrogation payments we expect to recover.

The low point of each year’s range corresponds to approximately one standard error below each year’s mean reserve estimate, while the high point corresponds to approximately one standard error above each year’s mean reserve estimate. We discussed management’s reasons for basing reasonably likely reserve ranges on standard errors in Critical Accounting Estimates, Reserve Estimate Variability.

The ranges reflect our assessment of the most likely unpaid loss and loss expenses at year-end 2020 and 2019. However, actual unpaid loss and loss expenses could nonetheless fall outside of the indicated ranges.

Management’s best estimate of total loss and loss expense reserves as of year-end 2020 and 2019 was consistent with the corresponding actuarial best estimate.

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Property Casualty Insurance Development of Estimated Reserves by Accident Year

The following table shows net reserve changes at year-end 2020, 2019 and 2018 by property casualty segment and accident year:

(Dollars in millions)						Commercial						Personal						E&S
						lines						lines						lines						Other						Totals
As of December 31, 2020
2019 accident year						$	(51)					$	(22)					$	(2)					$	(5)					$	(80)
2018 accident year						(44)						(3)						—						(9)						(56)
2017 accident year						(4)						3						(1)						(6)						(8)
2016 accident year						4						1						8						(5)						8
2015 accident year						(10)						—						1						—						(9)
2014 accident year						4						1						1						—						6
2013 and prior accident years						6						2						—						—						8
(Favorable)/unfavorable						$	(95)					$	(18)					$	7					$	(25)					$	(131)
As of December 31, 2019
2018 accident year						$	(67)					$	(10)					$	(6)					$	(7)					$	(90)
2017 accident year						(48)						(6)						(1)						(6)						(61)
2016 accident year						(4)						(5)						(1)						(5)						(15)
2015 accident year						(27)						(1)						(1)						—						(29)
2014 accident year						(16)						(3)						(1)						—						(20)
2013 accident year						(16)						(2)						(1)						—						(19)
2012 and prior accident years						(14)						—						—						—						(14)
(Favorable)/unfavorable						$	(192)					$	(27)					$	(11)					$	(18)					$	(248)
As of December 31, 2018
2017 accident year						$	(68)					$	11					$	(8)					$	3					$	(62)
2016 accident year						(34)						2						(3)						(2)						(37)
2015 accident year						(31)						3						(7)						—						(35)
2014 accident year						(3)						(1)						(5)						—						(9)
2013 accident year						(9)						—						—						—						(9)
2012 accident year						(10)						(1)						(1)						—						(12)
2011 and prior accident years						(2)						(1)						—						—						(3)
(Favorable)/unfavorable						$	(157)					$	13					$	(24)					$	1					$	(167)

Overall favorable development for consolidated property casualty reserves of $131 million in 2020 illustrated the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and workers’ compensation. As noted in Critical Accounting Estimates, Key Assumptions Loss Reserving, our models predict that actual loss and loss expense emergence will differ from projections, and we do not attempt to monitor or identify such normal variations. The table in Property Casualty Loss and Loss Expense Obligations and Reserves shows reserves by segment and lines of business and the components of gross reserves among case, IBNR and loss expense reserves.

Favorable reserve development was $54 million for our commercial casualty line of business and $39 million for our workers’ compensation line of business, together accounting for approximately 71% of the overall total. Drivers of significant reserve development typically reflect loss emergence on known claims that was more favorable or less favorable than previously anticipated for various lines of business and are discussed below.

• Commercial casualty – During 2020 and 2019, we continued to experience favorable development on prior accident years in aggregate. We continue to watch this line so we can detect unfavorable trends should they reoccur.

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• Workers’ compensation – We continue to see favorable reserve development, for all prior accident years in aggregate. During 2020 and 2019, the trend for estimated payments to be made in future calendar years was stable compared with 2018. However, we continue to monitor this line closely, as a sudden increase in trend for future payments has a highly leveraged effect.

• Commercial auto – Loss emergence continued to develop unfavorably during parts of 2020. This line of business has been troublesome for the industry in recent years. As part of the U.S. economic recession several years ago, slowing business activity influenced our estimates of reserves for ultimate losses and loss expenses during that period. As the economy slowly recovered, we believe we were slow to recognize some of the higher loss cost effects in current accident year reserve estimates for at least part of that period. As claims that occurred during that period have become more mature, paid and reported loss cost trends resulted in us increasing our estimated ultimate losses.

In consideration of the data’s credibility, we analyze commercial and personal umbrella liability reserves together and then allocate the derived total reserve estimate to the commercial and personal coverages. Consequently, all of the umbrella factors that contributed to commercial lines reserve development also contributed to personal lines reserve development through the other personal line, of which personal umbrella coverages are a part.

For the excess and surplus lines insurance segment, the table showing reserves by segment and lines of business in Property Casualty Loss and Loss Expense Obligations and Reserves, shows the components of gross reserves among case, IBNR and loss expense reserves. Total gross reserves increased $95 million from year-end 2019, largely due to the increase in premiums and exposures for this segment, as we discussed in Excess and Surplus Lines Insurance Results. More prudent reserving, as claims on average are remaining open longer than previously expected, also contributed to the increase. Adverse, or unfavorable, reserve development netted to $7 million during 2020, following favorable development during 2019 of $11 million for excess and surplus lines insurance segment reserves, shown in the table above, illustrates the potential for revisions inherent in estimating reserves.

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Life Insurance Policyholder Obligations and Reserves

Gross Life Insurance Policyholder Obligations

Our estimates of life, annuity and disability policyholder obligations reflect future estimated cash payments to be made to policyholders for future policy benefits, policyholders’ account balances and separate account liabilities. These estimates include death and disability income claims, policy surrenders, policy maturities, annuity payments, minimum guarantees on separate account products, commissions and premium taxes offset by expected future deposits and premiums on in-force contracts. Further, these estimates are based on mortality, morbidity and lapse assumptions reflective of our recent experience and expectations of future payment obligations.

Our estimates of gross life, annuity and disability obligations do not reflect net recoveries from reinsurance agreements. Ceded life reinsurance receivables were $217 million at year-end 2020. As discussed in 2021 Reinsurance Programs, we purchase reinsurance to mitigate our life insurance risk exposure. At year-end 2020, ceded death benefits represented approximately 34.2% of our total gross policy face amounts in force.

These estimated cash outflows are undiscounted with respect to interest. As a result, the sum of the cash outflows for all years of $5.814 billion (total of life insurance obligations) exceeds the liabilities recorded in life policy and investment contract reserves and separate accounts for future policy benefits and claims of $3.853 billion (total of life insurance policy reserves and separate account policy reserves). A significant portion of the difference can be attributed to the time value of money and changes in mortality, morbidity and lapse assumptions between the date the liabilities were originally established and the current date.

We have made significant assumptions to determine the estimated undiscounted cash flows of these policies and contracts that include mortality, morbidity, timing of claims, future lapse rates and interest crediting rates. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results.

Life Insurance Reserves

Gross life policy reserves were $2.915 billion at year-end 2020, compared with $2.835 billion at year-end 2019. The increase was primarily due to reserves for traditional life insurance contracts. We establish 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.

We regularly review our life insurance business to ensure that any deferred acquisition cost associated with the business is recoverable and that our actuarial liabilities (life insurance segment reserves) make sufficient provision for future benefits and related expenses.

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2021 Reinsurance Ceded Programs

A single large loss or an unexpected rise in claims severity or frequency due to a catastrophic event is a risk to the company's liquidity and financial strength. To control such losses, we limit marketing property casualty insurance in specific geographic areas and monitor our exposure in certain coastal regions. Examples of this include the reduction in recent years of our homeowner policies in the southeastern U.S. coastal region or limiting our earthquake writings in the New Madrid regions. Loss exposures in these areas have been identified as a major contributor to our catastrophe probable maximum loss estimates. The table below includes probable maximum loss estimates for the peril of hurricane. These estimates were subsequently reduced, in large part due to less exposure from southeastern U.S. homeowner policies. We also continually review aggregate exposures to large disasters and purchase reinsurance protection to cover these exposures. For business other than Cincinnati Re and Cincinnati Global, we use the Risk Management Solutions (RMS) and Applied Insurance Research (AIR) models to evaluate exposures to a once-in-a-100-year and a once-in-a-250-year event to help determine appropriate reinsurance coverage programs. In conjunction with these activities, we also continue to evaluate information provided by our reinsurance broker. Examples include deterministic modeling of probable maximum loss contribution from growth in new geographic territories.

To help determine appropriate reinsurance coverage for hurricane, earthquake and tornado/hail exposures, for business other than Cincinnati Re and Cincinnati Global we use the RMS and AIR models to estimate the probable maximum loss from a single event or multiple events occurring in a one-year period. The models are proprietary in nature, and the vendors that provide them periodically update the models, sometimes resulting in significant changes to their estimate of probable maximum loss. As of the end of 2020, both models indicated that a hurricane event represents our largest amount of exposure to losses. The table below summarizes estimated probabilities and the corresponding probable maximum loss from a single hurricane event occurring in a one-year period, for business other than Cincinnati Re and Cincinnati Global, and indicates the effect of such losses on consolidated shareholders’ equity at December 31, 2020. Net losses are net of reinsurance, estimated reinstatement premiums and income taxes, assuming a 21% federal tax rate, and assume our 2021 reinsurance programs apply.

(Dollars in millions)			RMS Model									AIR Model
									Percent									Percent
			Gross			Net			of total			Gross			Net			of total
Probability at December 31, 2020			losses			losses			equity			losses			losses			equity
2.0% (1 in 50 year event)			$	398		$	142		1.3		%	$	421		$	143		1.3		%
1.0% (1 in 100 year event)			636			163			1.5			633			157			1.5
0.4% (1 in 250 year event)			1,075			402			3.7			959			280			2.6
0.2% (1 in 500 year event)			1,502			737			6.8			1,285			546			5.1

The modeled losses according to RMS in the table are based on its RiskLink version 18.1 catastrophe model and use a long-term storm catalog methodology. The modeled losses according to AIR in the table are based on its AIR Touchstone® version 7.3 catastrophe model and use a long-term methodology. The AIR and RMS storm catalogs include decades of documented weather events used in simulations for probable maximum loss projections.

Reinsurance mitigates the risk of highly uncertain exposures and limits the maximum net loss that can arise from large risks or risks concentrated in areas of exposure. Management’s decisions about the appropriate structure of reinsurance protection and level of risk retention are affected by various factors, including changes in our underwriting practices, capacity to retain risks and reinsurance market conditions.

Reinsurance does not relieve us of our obligation to pay covered claims. The financial strength of our reinsurers is important because our ability to recover for losses covered under any reinsurance agreement depends on the financial viability of the reinsurer.

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For 2021, the primary participants on our standard market property and casualty per-risk and per-occurrence reinsurance ceded programs include Hannover Reinsurance Company, Munich Reinsurance America, Partner Reinsurance Company of the U.S. and Swiss Reinsurance America Corporation, all of which had A.M. Best insurer financial strength ratings of A (Excellent) or better as of December 31, 2020. Our property catastrophe program is subscribed through a broker by reinsurers from the United States, Bermuda, London and the European markets. The largest participant in our property catastrophe program, representing approximately 34% of total participation, is the Lloyd's of London placement that features numerous syndicates. Some of the other reinsurers with large participation in the program include the Liberty Syndicate, Lancashire Re, R&V Versicherung AG and Hamilton Re.

The following table shows our five largest property casualty reinsurance receivable amounts by reinsurer at year-end 2020 and 2019. Michigan Catastrophic Claims Association is a mandatory nonprofit association which runs a reinsurance program funded by an annual premium assessment per vehicle. This assessment covers Michigan’s automobile no-fault policies which provide unlimited lifetime coverage for medical expenses resulting from auto accidents. The A.M. Best insurer financial strength ratings as of the end of the two most recent years are also shown for each of those reinsurers that have an applicable rating.

(Dollars in millions)						2020												2019
Name of reinsurer						Total receivable						A.M. Best Rating						Total receivable						A.M. Best Rating
Munich Reinsurance America						$	44					A+						$	61					A+
Swiss Reinsurance America Corporation						41						A+						51						A+
Michigan Catastrophic Claims Association						39						NA						43						NA
General Reinsurance Corporation						28						A++						29						A++
Hannover Re						20						A+						35						A+

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Primary components of the 2021 property and casualty reinsurance program are summarized below. The premium estimates below occurred near the beginning of each respective year, when direct written premiums that were subject to applicable reinsurance treaties were also estimated.

• Property per risk treaty – The primary purpose of the property treaty is to provide capacity up to $50 million, adequate for the majority of the risks we write. It also includes protection for extra-contractual liability coverage losses. We retain the first $10 million of each loss. Losses between $10 million and $50 million are reinsured at 100%. The 2021 ceded premium estimate was $36 million, compared with $31 million for the 2020 estimate.

• Property excess treaty – We purchased a property reinsurance treaty that provides an additional $50 million in protection for certain property losses. This treaty, along with the property per risk treaty, provides a total of $100 million of protection. The 2021 ceded premium estimate was approximately $4 million, compared with $3 million for the 2020 estimate.

• Casualty per occurrence treaty – The casualty treaty provides capacity up to $25 million. Similar to the property treaty, it provides sufficient capacity to cover the vast majority of casualty accounts we insure and also includes protection for extra-contractual liability coverage losses. We retain the first $10 million of each loss. Losses between $10 million and $25 million are reinsured at 100%. The 2021 ceded premium estimate was $13 million, compared with $12 million for the 2020 estimate.

• Casualty excess treaty – We purchase a casualty reinsurance treaty that provides an additional $45 million in protection for certain casualty losses. This treaty, along with the casualty per occurrence treaty, provides a total of $70 million of protection for workers’ compensation, extra-contractual liability coverage and clash coverage losses, which would apply when a single occurrence involves multiple policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The 2021 ceded premium estimate was approximately $3 million, essentially unchanged from the 2020 estimate.

• Property catastrophe treaty – To protect against catastrophic events such as wind and hail, hurricanes or earthquakes, we purchased property catastrophe reinsurance with a limit up to $800 million. Parts of this treaty include terms and conditions that cover multiple years. As a result, $114 million of coverage in effect for 2021 does not include an exclusion for communicable diseases such as a virus. The remainder of this treaty, and our other property and casualty treaties effective in 2021 include exclusions for communicable disease and cyber losses. Aggregation of losses into one event, sometimes referred to as an hours clause, varies by peril. For example, the general provision in this treaty is 168 hours, but it is 120 hours for a wind event and 96 hours for a riot or civil commotion event. Losses from the same occurrence can be aggregated into one limit over the hour period applicable to the peril causing the loss and applied to the treaty towards recovery. The treaty contains one reinstatement provision. The 2021 ceded premium estimate was $47 million, compared with $44 million for the 2020 estimate. We retain the first $100 million of any loss, and a share of losses up to $800 million. The percentage share we retain for each layer of coverage is indicated below:

◦33.0% of losses between $100 million and $200 million

◦9.0% of losses between $200 million and $300 million

◦5.0% of losses between $300 million and $400 million

◦5.0% of losses between $400 million and $600 million

◦22.5% of losses between $600 million and $800 million

• Effective June 1, 2020, we restructured and renewed our combined property catastrophe occurrence excess of loss treaty for a period of one year, commuting the expiring treaty one month in advance of its expiration date. The treaty provides coverage for various combinations of occurrences, has an aggregate limit of $50 million in excess of $150 million per loss and applies to business written on a direct basis and by Cincinnati Re. Cincinnati Global catastrophe losses are not applicable to the treaty. Ceded premiums for the one-year renewal period of coverage from this treaty are estimated to be approximately $11 million. 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.

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After reinsurance, our maximum exposure to a catastrophic event that causes $800 million in covered losses in 2021 would be $202 million, compared with our retention of $249 million for 2020. The largest catastrophe loss event in our history occurred during 2011 from a May 20-27 storm system that included a tornado in Joplin, Missouri, and that also included significant losses from hail in the Dayton, Ohio, area. Our losses from that storm were estimated to be $226 million before reinsurance, based on updated estimates as of December 31, 2017.

Individual risks with insured values in excess of $100 million, as identified in the policy, are handled through a different reinsurance mechanism. We typically reinsure property coverage for individual risks with insured values between $100 million and $225 million under an automatic facultative agreement. For risks with property values exceeding $225 million, we negotiate the purchase of facultative coverage on an individual certificate basis. For casualty coverage on individual risks with limits exceeding $25 million, facultative reinsurance coverage is placed on an individual certificate basis. For risks with casualty limits that are between $25 million and $27 million, we sometimes forego facultative reinsurance and retain an additional $2 million of loss exposure.

Terrorism coverage at various levels has been secured in most of our reinsurance agreements. The broadest coverage for this peril is found in the property and casualty working treaties, the property per risk treaty and the casualty per occurrence treaty, which provide coverage for commercial and personal risks. Our property catastrophe treaty provides terrorism coverage for personal risks, and coverage for commercial risks with total insured values of $15 million or less. For insured values between $15 million and $100 million, there also may be coverage in the property working treaty.

A form of reinsurance is also provided through The Terrorism Risk Insurance Act of 2002 (TRIA). TRIA was originally signed into law on November 26, 2002, and extended on several occasions. The most recent extension was signed into law on December 20, 2019, and is scheduled to expire on December 31, 2027. TRIA provides a temporary federal backstop for losses related to the writing of the terrorism peril in property casualty insurance policies. Under regulations promulgated under this statute, insurers are required to offer terrorism coverage for certain lines of property casualty insurance, including property, commercial multi-peril, fire, ocean marine, inland marine, liability, aircraft and workers’ compensation. In the event of a terrorism event defined by TRIA, the federal government would reimburse terrorism claim payments subject to the insurer’s deductible. The deductible is calculated as a percentage of subject written premiums for the preceding calendar year. Our deductible in 2020 was $580 million (20% of 2019 subject premiums), and we estimate it is $610 million (20% of 2020 subject premiums) for 2021.

Reinsurance protection for the company’s surety business is covered under a separate treaty with many of the same reinsurers that write the property casualty working treaties. Reinsurance protection for Cincinnati Global's business is also provided through separate treaties.

The Cincinnati Specialty Underwriters Insurance Company has separate property and casualty reinsurance treaties for 2021 through its parent, The Cincinnati Insurance Company. Primary components of the treaties include:

• Property per risk treaty – The property treaty provides limits up to $5 million, which is adequate capacity for the risk profile we insure. It also includes protection for extra-contractual liability coverage losses. Cincinnati Specialty Underwriters retains the first $1 million of any policy loss. Losses between $1 million and $5 million are reinsured at 100% by The Cincinnati Insurance Company.

• Casualty treaties – The casualty treaty is written on an excess of loss basis and provide limits up to $6 million, which is adequate capacity for the risk profile we insure. A second treaty layer of $5 million excess of $6 million is written to provide coverage for extra contractual obligations or clash exposures. The maximum retention for any one casualty loss is $2 million by Cincinnati Specialty Underwriters. Losses between $2 million and $6 million are reinsured at 100% by The Cincinnati Insurance Company.

• Basket retention – Cincinnati Specialty Underwriters has purchased this coverage to limit their retention to $2 million in the event that the same occurrence results in both a property and a casualty loss.

• Property catastrophe treaty – As a subsidiary of The Cincinnati Insurance Company, Cincinnati Specialty Underwriters is a named insured under our corporate property catastrophe treaty. All terms and conditions of this reinsurance coverage apply to policies underwritten by Cincinnati Specialty Underwriters.

For property risks with limits exceeding $5 million or casualty risks with limits exceeding $6 million, underwriters place facultative reinsurance coverage on an individual certificate basis.

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Cincinnati Life, our life insurance subsidiary, purchases reinsurance under separate treaties with many of the same reinsurers that write the property casualty working treaties. Our corporate retention is $1 million on a single life. For most of our core term life insurance line of business, we retain no more than a $500,000 exposure on a single policy, ceding the balance using excess over retention mortality coverage, and retaining the policy reserve. Because of the conservative nature of statutory reserving principles, retaining the policy reserve unduly depresses our statutory earnings and requires a large commitment of our capital. Effective November 1, 2015, we increased our retention to $1 million for issue ages up to 61 years on new term life insurance sales. For issue ages 61 years or older, our retention remains $500,000. For term life insurance business written prior to 2005, we retain 10% to 25% of each term policy, not to exceed $500,000, ceding the balance of mortality risk and policy reserve.

We also have catastrophe reinsurance coverage on our life insurance operations that reimburses us for covered net losses in excess of $13 million. Our recovery is capped at $75 million for losses involving our associates.

The following table shows our five largest life reinsurance receivable amounts by reinsurer at year-end 2020 and 2019. Insurer financial strength ratings are also shown.

(Dollars in millions)						2020																		2019
Name of reinsurer						Total receivable						Rating agency						Rating						Total receivable						Rating Agency						Rating
Swiss Re Life & Health America, Inc.						$	71					A.M. Best						A+						$	77					A.M. Best						A+
General Re Life Corporation						43						A.M. Best						A++						41						A.M. Best						A++
Lincoln National Life Insurance Company						31						A.M. Best						A+						36						A.M. Best						A+
Security Life of Denver Insurance Company						22						S&P						A+						24						A.M. Best						A
Employers Reassurance Corporation						15						S&P						BBB+						14						A.M. Best						B+

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Safe Harbor Statement

This is our “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in Item 1A, Risk Factors.

Factors that could cause or contribute to such differences include, but are not limited to:

• Effects of the COVID-19 pandemic that could affect results for reasons such as:

◦Securities market disruption or volatility and related effects such as decreased economic activity that affect the company’s investment portfolio and book value

◦An unusually high level of claims in our insurance or reinsurance operations that increase litigation-related expenses

◦An unusually high level of insurance losses, including risk of legislation or court decisions extending business interruption insurance in commercial property coverage forms to cover claims for pure economic loss related to the COVID-19 pandemic

◦Decreased premium revenue and cash flow from disruption to our distribution channel of independent agents, consumer self-isolation, travel limitations, business restrictions and decreased economic activity

◦Inability of our workforce, agencies or vendors to perform necessary business functions

• Ongoing developments concerning business interruption insurance claims and litigation related to the COVID-19 pandemic that affect our estimates of losses and loss adjustment expenses or our ability to reasonably estimate such losses, such as:

◦The continuing duration of the pandemic and governmental actions to limit the spread of the virus that may produce additional economic losses

◦The number of policyholders that will ultimately submit claims or file lawsuits

◦The lack of submitted proofs of loss for allegedly covered claims

◦Judicial rulings in similar litigation involving other companies in the insurance industry

◦Differences in state laws and developing case law 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

◦The inherent unpredictability of litigation

• Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes

• Increased frequency and/or severity of claims or development of claims that are unforeseen at the time of policy issuance

• Inadequate estimates, assumptions or reliance on third-party data used for critical accounting estimates

• Declines in overall stock market values negatively affecting the company’s equity portfolio and book value

• Prolonged low interest rate environment or other factors that limit the company’s ability to generate growth in investment income or interest rate fluctuations that result in declining values of fixed-maturity investments, including declines in accounts in which we hold bank-owned life insurance contract assets

• Domestic and global events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic instability or recession, that lead to:

◦Significant or prolonged decline in the fair value of a particular security or group of securities and impairment of the asset(s)

◦Significant decline in investment income due to reduced or eliminated dividend payouts from a particular security or group of securities

◦Significant rise in losses from surety and director and officer policies written for financial institutions or other insured entities

• Our inability to integrate Cincinnati Global and its subsidiaries into our ongoing operations, or disruptions to our ongoing operations due to such integration

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• Recession or other economic conditions resulting in lower demand for insurance products or increased payment delinquencies

• Difficulties with technology or data security breaches, including cyberattacks, that could negatively affect our ability to conduct business; disrupt our relationships with agents, policyholders and others; cause reputational damage, mitigation expenses and data loss and expose us to liability under federal and state laws

• Disruption of the insurance market caused by technology innovations such as driverless cars that could decrease consumer demand for insurance products

• Delays, inadequate data developed internally or from third parties, or performance inadequacies from ongoing development and implementation of underwriting and pricing methods, including telematics and other usage-based insurance methods, or technology projects and enhancements expected to increase our pricing accuracy, underwriting profit and competitiveness

• Increased competition that could result in a significant reduction in the company’s premium volume

• Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could alter our competitive advantages

• Inability to obtain adequate ceded reinsurance on acceptable terms, amount of reinsurance coverage purchased, financial strength of reinsurers and the potential for nonpayment or delay in payment by reinsurers

• Inability to defer policy acquisition costs for any business segment if pricing and loss trends would lead management to conclude that segment could not achieve sustainable profitability

• Inability of our subsidiaries to pay dividends consistent with current or past levels

• Events or conditions that could weaken or harm the company’s relationships with its independent agencies and hamper opportunities to add new agencies, resulting in limitations on the company’s opportunities for growth, such as:

◦Downgrades of the company’s financial strength ratings

◦Concerns that doing business with the company is too difficult

◦Perceptions that the company’s level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace

◦Inability or unwillingness to nimbly develop and introduce coverage product updates and innovations that our competitors offer and consumers expect to find in the marketplace

• Actions of insurance departments, state attorneys general or other regulatory agencies, including a change to a federal system of regulation from a state-based system, that:

◦Impose new obligations on us that increase our expenses or change the assumptions underlying our critical accounting estimates

◦Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations

◦Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business

◦Add assessments for guaranty funds, other insurance‑related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes

◦Increase our provision for federal income taxes due to changes in tax law

◦Increase our other expenses

◦Limit our ability to set fair, adequate and reasonable rates

◦Place us at a disadvantage in the marketplace

◦Restrict our ability to execute our business model, including the way we compensate agents

• Adverse outcomes from litigation or administrative proceedings

• Events or actions, including unauthorized intentional circumvention of controls, that reduce the company’s future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002

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• Unforeseen departure of certain executive officers or other key employees due to retirement, health or other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of certain longstanding relationships with insurance agents and others

• Events, such as an epidemic, natural catastrophe or terrorism, that could hamper our ability to assemble our workforce at our headquarters location

Further, the company’s insurance businesses are subject to the effects of changing social, global, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.

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