Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
34
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(Dollars are per share)
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Three months ended September 30,
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Nine months ended September 30,
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2017
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2016
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2017
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2016
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Book value change per share:
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End of period book value
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$
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45.86
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$
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43.24
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$
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45.86
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$
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43.24
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Less beginning of period book value
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44.97
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42.37
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42.95
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39.20
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Change in book value
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$
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0.89
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$
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0.87
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$
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2.91
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$
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4.04
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Change in book value:
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Net income before realized gains
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$
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0.59
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$
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0.87
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$
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1.84
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$
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2.34
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Change in fixed-maturity securities, realized
and unrealized gains
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0.05
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(0.04
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)
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0.53
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1.14
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Change in equity securities, realized and
unrealized gains
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0.72
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0.51
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2.23
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2.02
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Dividend declared to shareholders
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(0.50
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)
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(0.48
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)
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(1.50
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)
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(1.44
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)
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Other
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0.03
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0.01
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(0.19
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)
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(0.02
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)
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Change in book value
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$
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0.89
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$
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0.87
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$
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2.91
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$
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4.04
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(Dollars are per share)
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Three months ended September 30,
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Nine months ended September 30,
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2017
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2016
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2017
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2016
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Value creation ratio:
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End of period book value
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$
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45.86
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$
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43.24
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$
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45.86
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$
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43.24
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Less beginning of period book value
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44.97
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42.37
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42.95
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39.20
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Change in book value
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0.89
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|
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0.87
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|
|
2.91
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|
|
4.04
|
|
|
Dividend declared to shareholders
|
|
0.50
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|
|
0.48
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|
|
1.50
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|
|
1.44
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Total value creation
|
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$
|
1.39
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|
|
$
|
1.35
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|
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$
|
4.41
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|
|
$
|
5.48
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|
|
|
|
|
|
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Value creation ratio from change in book
value*
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2.0
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%
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2.1
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%
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6.8
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%
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10.3
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%
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Value creation ratio from dividends declared to
shareholders**
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1.1
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|
1.1
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3.5
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3.7
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Value creation ratio
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3.1
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%
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3.2
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%
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10.3
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%
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14.0
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%
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*Change in book value divided by the beginning of period book value
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**Dividend declared to shareholders divided by beginning of period book value
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DRIVERS OF LONG-TERM VALUE CREATION
Operating through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on 2016 net written premiums for approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies as discussed in our 2016 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. At September 30, 2017, we actively marketed through agencies located in 42 states. We maintain a long-term perspective that guides us in addressing immediate challenges or opportunities while focusing on the major decisions that best position our company for success through all market cycles.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
35
To measure our long-term progress in creating shareholder value, our value creation ratio is our primary financial performance target. As discussed in our 2016 Annual Report on Form 10-K, Item 7, Executive Summary, Page 43, management believes this non-GAAP measure is a meaningful indicator of our long-term progress in creating shareholder value, is a useful supplement to GAAP information and has
three primary performance drivers:
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•
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Premium growth – We believe our agency relationships and initiatives can lead to a property casualty written premium growth rate over any five-year period that exceeds the industry average. For the first nine months of 2017, our consolidated property casualty net written premium year-over-year growth was 6 percent, comparing favorably with the industry’s 4.5 percent growth rate reported by A.M. Best for the first six months of 2017. For the five-year period 2012 through 2016, our growth rate was approximately double that of the industry.
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•
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Combined ratio – We believe our underwriting philosophy and initiatives can generate a GAAP combined ratio over any five-year period that is consistently within the range of 95 percent to 100 percent. For the first nine months of 2017, our GAAP combined ratio was 99.1 percent and our statutory combined ratio was 98.3 percent, both including 9.9 percentage points of current accident year catastrophe losses partially offset by 2.7 percentage points of favorable loss reserve development on prior accident years. Our nine-month statutory combined ratio was lower than the 100.9 percent reported for the industry by A.M. Best for the first six months of 2017.
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•
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Investment contribution – We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year return of the Standard & Poor’s 500 Index. For the first nine months of 2017, pretax investment income was $453 million, up 2 percent compared with the same period in 2016. We believe our investment portfolio mix provides an appropriate balance of income stability and growth with capital appreciation potential.
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Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
36
Highlights of Our Strategy and Supporting Initiatives
Management has worked to identify a strategy that can lead to long-term success, with concurrence by the board of directors. Our strategy is intended to position us to compete successfully in the markets we have targeted while appropriately managing risk. Further description of our long-term, proven strategy can be found in our 2016 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 5. We believe successful implementation of initiatives that support our strategy will help us better serve our agent customers and reduce volatility in our financial results while we also grow earnings and book value over the long term, successfully navigating challenging economic, market or industry pricing cycles.
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•
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Manage insurance profitability – Implementation of these initiatives is intended to enhance underwriting expertise and knowledge, thereby increasing our ability to manage our business while also gaining efficiency. Better profit margins can arise from additional information and more focused action on underperforming product lines, plus pricing capabilities we are expanding through the use of technology and analytics. In addition to enhancing company efficiency, improving internal processes also supports the ability of the independent agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses.
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We continue to enhance our property casualty underwriting expertise and to effectively and efficiently underwrite individual policies and process transactions. Ongoing initiatives supporting this work include expanding our pricing and segmentation capabilities through experience and use of predictive analytics and additional data. Our segmentation efforts emphasize identification and retention of insurance policies we believe have relatively stronger pricing, while seeking more aggressive renewal terms and conditions on policies we believe have relatively weaker pricing. In 2017, we continue to improve underwriting and rate adequacy for our commercial auto and personal auto lines of business. Our commercial auto policies that renewed during the first nine months of 2017 experienced an estimated average price increase at percentages in the high-single-digit range, with the third quarter higher than the second quarter. Our personal auto policies that renewed during the first nine months of 2017 averaged an estimated price increase at percentages near the low end of the high-single-digit range.
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•
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Drive premium growth – Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Premium growth initiatives also include expansion of Cincinnati Re
SM
– our reinsurance assumed operation. Diversified growth also may reduce variability of losses from weather-related catastrophes.
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We continue to appoint new agencies to develop additional points of distribution. In 2017, we are planning approximately 100 appointments of independent agencies that offer most or all of our property casualty insurance products. During the first nine months of 2017, we appointed 86 new agencies that meet that criteria.
We also plan to appoint additional agencies that focus on high net worth personal lines clients. In 2017, we are targeting the appointment of approximately 100 agencies that market only personal lines products for us. During the first nine months of 2017, we appointed 92 new agencies that meet that criteria.
As of September 30, 2017, a total of 1,704 agency relationships market our property casualty insurance products from 2,237 reporting locations.
We also continue to grow premiums through the disciplined expansion of Cincinnati Re. During the first nine months of 2017, Cincinnati Re contributed $48 million of growth in consolidated property casualty insurance net written premiums.
Financial Strength
An important part of our long-term strategy is financial strength, which is described in our 2016 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Financial Strength, Page 7. One aspect of our financial strength is prudent use of reinsurance ceded to help manage financial performance variability due to catastrophe loss experience. A description of how we use reinsurance ceded is included in our 2016 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, 2017 Reinsurance Ceded Programs, Page 101. Another aspect of our financial strength is our investment portfolio, which remains well-diversified as discussed in this quarterly report in Item 3, Quantitative and Qualitative Disclosures About Market Risk. Our strong parent-company liquidity and financial strength increase our flexibility to maintain a cash dividend through all periods and to continue to invest in and expand our insurance operations.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
37
At September 30, 2017, we held $2.515 billion of our cash and invested assets at the parent-company level, of which $2.202 billion, or 87.6 percent, was invested in common stocks, and $234 million, or 9.3 percent, was cash or cash equivalents. Our debt-to-total-capital ratio of 9.7 percent remains well below our target limit. Another important indicator of financial strength is our ratio of property casualty net written premiums to statutory surplus, which was 1.0-to-1 for the 12 months ended September 30, 2017, matching year-end 2016.
Financial strength ratings assigned to us by independent rating firms also are important. In addition to rating our parent company’s senior debt, four firms award insurer financial strength ratings to one or more of our insurance subsidiary companies based on their quantitative and qualitative analyses. These ratings primarily assess an insurer’s ability to meet financial obligations to policyholders and do not necessarily address all of the matters that may be important to investors. Ratings are under continuous review and subject to change or withdrawal at any time by the rating agency. Each rating should be evaluated independently of any other rating; please see each rating agency's website for its most recent report on our ratings.
At October 25, 2017, our insurance subsidiaries continued to be highly rated.
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Insurer Financial Strength Ratings
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Rating
agency
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Standard market property casualty insurance subsidiaries
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Life insurance
subsidiary
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Excess and surplus lines insurance subsidiary
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Outlook
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Rating
tier
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Rating
tier
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Rating
tier
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A.M. Best Co.
ambest.com
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A+
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Superior
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2 of 16
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A
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Excellent
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3 of 16
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A+
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Superior
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2 of 16
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Stable
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Fitch Ratings
fitchratings.com
|
A+
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Strong
|
5 of 21
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A+
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Strong
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5 of 21
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-
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-
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-
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Stable
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Moody's Investors Service
moodys.com
|
A1
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Good
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5 of 21
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-
|
-
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-
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-
|
-
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-
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Stable
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S&P Global Ratings
spratings.com
|
A+
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Strong
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5 of 21
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A+
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Strong
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5 of 21
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-
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-
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-
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Stable
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Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
38
CONSOLIDATED PROPERTY CASUALTY INSURANCE HIGHLIGHTS
Consolidated property casualty insurance results include premiums and expenses for our standard market insurance segments (commercial lines and personal lines), our excess and surplus lines segment and our reinsurance assumed operations.
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(Dollars in millions)
|
|
Three months ended September 30,
|
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Nine months ended September 30,
|
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|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Earned premiums
|
|
$
|
1,191
|
|
|
$
|
1,133
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|
|
5
|
|
|
$
|
3,523
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|
|
$
|
3,343
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|
|
5
|
|
|
Fee revenues
|
|
2
|
|
|
3
|
|
|
(33
|
)
|
|
8
|
|
|
7
|
|
|
14
|
|
|
Total revenues
|
|
1,193
|
|
|
1,136
|
|
|
5
|
|
|
3,531
|
|
|
3,350
|
|
|
5
|
|
|
Loss and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Current accident year before catastrophe losses
|
|
721
|
|
|
676
|
|
|
7
|
|
|
2,144
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|
2,001
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|
7
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|
Current accident year catastrophe losses
|
|
114
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|
|
54
|
|
|
111
|
|
|
349
|
|
|
260
|
|
|
34
|
|
|
Prior accident years before catastrophe losses
|
|
(14
|
)
|
|
(42
|
)
|
|
67
|
|
|
(76
|
)
|
|
(146
|
)
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|
48
|
|
|
Prior accident years catastrophe losses
|
|
(6
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)
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|
2
|
|
|
nm
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|
|
(20
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)
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|
(5
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)
|
|
(300
|
)
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|
Loss and loss expenses
|
|
815
|
|
|
690
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|
|
18
|
|
|
2,397
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|
|
2,110
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|
14
|
|
|
Underwriting expenses
|
|
367
|
|
|
356
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|
|
3
|
|
|
1,094
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|
|
1,044
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|
|
5
|
|
|
Underwriting profit
|
|
$
|
11
|
|
|
$
|
90
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|
|
(88
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)
|
|
$
|
40
|
|
|
$
|
196
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|
|
(80
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)
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Ratios as a percent of earned premiums:
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Pt. Change
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Pt. Change
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Current accident year before catastrophe losses
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60.4
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%
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59.8
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%
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0.6
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60.8
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%
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59.9
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%
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0.9
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Current accident year catastrophe losses
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9.6
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4.7
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4.9
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9.9
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7.8
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|
2.1
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|
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Prior accident years before catastrophe losses
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|
(1.1
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)
|
|
(3.7
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)
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2.6
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|
|
(2.1
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)
|
|
(4.4
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)
|
|
2.3
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|
|
Prior accident years catastrophe losses
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|
(0.5
|
)
|
|
0.2
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|
|
(0.7
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)
|
|
(0.6
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)
|
|
(0.2
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)
|
|
(0.4
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)
|
|
Loss and loss expenses
|
|
68.4
|
|
|
61.0
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|
|
7.4
|
|
|
68.0
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|
|
63.1
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|
|
4.9
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|
|
Underwriting expenses
|
|
30.9
|
|
|
31.4
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|
|
(0.5
|
)
|
|
31.1
|
|
|
31.3
|
|
|
(0.2
|
)
|
|
Combined ratio
|
|
99.3
|
%
|
|
92.4
|
%
|
|
6.9
|
|
|
99.1
|
%
|
|
94.4
|
%
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
99.3
|
%
|
|
92.4
|
%
|
|
6.9
|
|
|
99.1
|
%
|
|
94.4
|
%
|
|
4.7
|
|
|
Contribution from catastrophe losses and prior
years reserve development
|
|
8.0
|
|
|
1.2
|
|
|
6.8
|
|
|
7.2
|
|
|
3.2
|
|
|
4.0
|
|
|
Combined ratio before catastrophe losses and
prior years reserve development
|
|
91.3
|
%
|
|
91.2
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%
|
|
0.1
|
|
|
91.9
|
%
|
|
91.2
|
%
|
|
0.7
|
|
|
|
|
|
|
|
|
|
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Our consolidated property casualty insurance operations generated an underwriting profit of $11 million and $40 million for the three and nine months ended September 30, 2017. The three-month decrease of $79 million, compared with the same period of 2016, was largely due to an increase of $52 million in losses from natural catastrophes that were mostly weather related. The nine-month decrease of $156 million, compared with the first nine months of 2016, included an increase of $74 million in losses from natural catastrophes. Both 2017 periods also experienced lower amounts of favorable reserve development on prior accident years. We believe future property casualty underwriting results will continue to benefit from price increases and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices.
For all property casualty lines of business in aggregate, net loss and loss expense reserves at September 30, 2017, were $284 million higher than at year-end 2016, including $123 million for the incurred but not reported (IBNR) portion. The $284 million reserve increase raised year-end 2016 net loss and loss expense reserves by 6 percent.
We measure and analyze property casualty underwriting results primarily by the combined ratio and its component ratios. The GAAP-basis combined ratio is the percentage of incurred losses plus all expenses per each earned premium dollar – the lower the ratio, the better the performance. An underwriting profit results when the combined ratio is below 100 percent. A combined ratio above 100 percent indicates that an insurance company’s losses and expenses exceeded premiums.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
39
Our consolidated property casualty combined ratio for the third quarter of 2017 rose 6.9 percentage points, compared with the same period of 2016, including 4.2 points from higher catastrophe losses and loss expenses. For the first nine months of 2017, compared with the same period of 2016, our consolidated property casualty combined ratio rose 4.7 percentage points, including 1.7 points from higher catastrophe losses and loss expenses.
The combined ratio can be affected significantly by natural catastrophe losses and other large losses as discussed in detail below. The combined ratio can also be affected by updated estimates of loss and loss expense reserves established for claims that occurred in prior periods, referred to as prior accident years. Net favorable development on prior accident year reserves, including reserves for catastrophe losses, benefited the combined ratio by 2.7 percentage points in the first nine months of 2017, compared with 4.6 percentage points in the same period of 2016. Net favorable development is discussed in further detail in Financial Results by property casualty insurance segment.
The ratio for current accident year loss and loss expenses before catastrophe losses rose in the first nine months of 2017. That 60.8 percent ratio increased 0.9 percentage points compared with the 59.9 percent accident year 2016 ratio measured as of September 30, 2016, including an increase of 0.7 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
The underwriting expense ratio for the third quarter and first nine months of 2017 decreased, compared with the same periods of 2016. Strategic investments that include enhancement of underwriting expertise were offset by the favorable effects of higher earned premiums and ongoing expense management efforts.
Consolidated Property Casualty Insurance Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Agency renewal written premiums
|
|
$
|
1,064
|
|
|
$
|
1,036
|
|
|
3
|
|
|
$
|
3,211
|
|
|
$
|
3,121
|
|
|
3
|
|
|
Agency new business written premiums
|
|
157
|
|
|
149
|
|
|
5
|
|
|
475
|
|
|
417
|
|
|
14
|
|
|
Cincinnati Re net written premiums
|
|
24
|
|
|
21
|
|
|
14
|
|
|
104
|
|
|
56
|
|
|
86
|
|
|
Other written premiums
|
|
(37
|
)
|
|
(31
|
)
|
|
(19
|
)
|
|
(80
|
)
|
|
(78
|
)
|
|
(3
|
)
|
|
Net written premiums
|
|
1,208
|
|
|
1,175
|
|
|
3
|
|
|
3,710
|
|
|
3,516
|
|
|
6
|
|
|
Unearned premium change
|
|
(17
|
)
|
|
(42
|
)
|
|
60
|
|
|
(187
|
)
|
|
(173
|
)
|
|
(8
|
)
|
|
Earned premiums
|
|
$
|
1,191
|
|
|
$
|
1,133
|
|
|
5
|
|
|
$
|
3,523
|
|
|
$
|
3,343
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The trends in net written premiums and earned premiums summarized in the table above include the effects of price increases. Price change trends that heavily influence renewal written premium increases or decreases, along with other premium growth drivers for 2017, are discussed in more detail by segment below in Financial Results.
Consolidated property casualty net written premiums for the three and nine months ended September 30, 2017, grew $33 million and $194 million compared with the same periods of 2016. Each of our property casualty segments continued to grow during the third quarter and first nine months of 2017. Our premium growth initiatives from prior years have provided an ongoing favorable effect on growth during the current year, particularly as newer agency relationships mature over time.
Consolidated property casualty agency new business written premiums rose $8 million and $58 million for the third quarter and first nine months of 2017, compared with the same periods of 2016. New business written premiums in the first nine months of 2017 were higher than the same period of 2016 for each of our property casualty insurance segments. New agency appointments during 2016 and 2017 produced a $44 million increase in standard lines new business for the first nine months of 2017 compared with the same period of 2016. As we appoint new agencies that choose to move accounts to us, we report these accounts as new business. While this business is new to us, in many cases it is not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that may be less familiar to our agent upon obtaining it from a competing agent.
Net written premiums for Cincinnati Re increased $3 million and $48 million for the third quarter and first nine months of 2017, compared with the same periods of 2016. 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
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
40
companies through transactions known as retrocessions. For the first nine months of 2017, earned premiums for Cincinnati Re totaled $80 million, compared with $33 million earned in the same period a year ago.
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. Those ceded premium totals for the third quarter and first nine months of 2017 were substantially similar to the same periods of 2016.
Catastrophe losses and loss expenses typically have a material effect on property casualty results and can vary significantly from period to period. Losses from natural catastrophes contributed 9.1 and 9.3 percentage points to the combined ratio in the third quarter and first nine months of 2017, respectively, compared with 4.9 and 7.6 percentage points in the same periods of 2016. Some of those losses were applicable to annual loss deductible provisions of our collateralized reinsurance funded through catastrophe bonds. For our collateralized reinsurance arrangement that became effective in January 2017, we can recover catastrophe bond funds if aggregate losses, after the $8 million per occurrence deductible, exceed $190 million during an annual coverage period. Aggregate losses from 10 events between January 23 and September 30, 2017, which occurred within the specific geographic locations included in the severe convective storm portion of our coverage, totaled $135 million, after our per occurrence deductible. The following table shows consolidated property casualty insurance catastrophe losses and loss expenses incurred, net of reinsurance, as well as the effect of loss development on prior period catastrophe events. We individually list declared catastrophe events for which our incurred losses reached or exceeded $10 million.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
41
Consolidated Property Casualty Insurance Catastrophe Losses and Loss Expenses Incurred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, net of reinsurance)
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
Comm.
|
|
Pers.
|
|
E&S
|
|
Cin.
|
|
|
|
|
Comm.
|
|
Pers.
|
|
E&S
|
|
Cin.
|
|
|
|
|
Dates
|
Region
|
lines
|
|
lines
|
|
lines
|
|
Re
|
|
Total
|
|
lines
|
|
lines
|
|
lines
|
|
Re
|
|
Total
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feb. 28-
Mar. 1
|
Midwest, South
|
$
|
(2
|
)
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
19
|
|
|
$
|
23
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
43
|
|
|
Mar. 6-9
|
Midwest, Northeast, South
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
36
|
|
|
Mar. 21-22
|
South
|
(3
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
19
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
Apr. 4-6
|
Midwest, South
|
1
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
8
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
Apr. 28-
May 1
|
Midwest, Northeast, South
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
5
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
May 8-11
|
Midwest, South, West
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
May 15-18
|
Midwest, Northeast, South
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
3
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
Jun. 11
|
Midwest
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
4
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
Jun. 16-19
|
Midwest, Northeast, South
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
7
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
Jun. 27-29
|
Midwest
|
16
|
|
|
—
|
|
|
—
|
|
|
|
|
16
|
|
|
18
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
19
|
|
|
Aug. 25-
Sep. 1
|
South
|
4
|
|
|
3
|
|
|
—
|
|
|
12
|
|
|
19
|
|
|
4
|
|
|
3
|
|
|
—
|
|
|
12
|
|
|
19
|
|
|
Sep. 6-12
|
International, South
|
14
|
|
|
21
|
|
|
1
|
|
|
25
|
|
|
61
|
|
|
14
|
|
|
21
|
|
|
1
|
|
|
25
|
|
|
61
|
|
|
All other 2017 catastrophes
|
2
|
|
|
4
|
|
|
—
|
|
|
6
|
|
|
12
|
|
|
31
|
|
|
18
|
|
|
—
|
|
|
6
|
|
|
55
|
|
|
Development on 2016 and prior
catastrophes
|
(4
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(15
|
)
|
|
(4
|
)
|
|
—
|
|
|
(1
|
)
|
|
(20
|
)
|
|
Calendar year incurred total
|
$
|
29
|
|
|
$
|
35
|
|
|
$
|
1
|
|
|
$
|
43
|
|
|
$
|
108
|
|
|
$
|
156
|
|
|
$
|
129
|
|
|
$
|
2
|
|
|
$
|
42
|
|
|
$
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apr. 2-3
|
Midwest, Northeast, South
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
Apr. 10-15
|
South
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
55
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
56
|
|
|
Apr. 25-28
|
Midwest, South
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
Apr. 29-
May 3
|
Midwest, South
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
19
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
May 7-10
|
Midwest, South, West
|
3
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
17
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
28
|
|
|
May 11-12
|
Midwest, South
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
May 21-28
|
Midwest, South, West
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
12
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
Jul. 28-29
|
West
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
Sep. 19-23
|
Midwest
|
1
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
1
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
All other 2016 catastrophes
|
11
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
47
|
|
|
28
|
|
|
1
|
|
|
—
|
|
|
76
|
|
|
Development on 2015 and prior
catastrophes
|
4
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
2
|
|
|
(2
|
)
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
Calendar year incurred total
|
$
|
31
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56
|
|
|
$
|
184
|
|
|
$
|
69
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
42
The following table includes data for losses incurred of $1 million or more per claim, net of reinsurance.
Consolidated Property Casualty Insurance Losses Incurred by Size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, net of reinsurance)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Current accident year losses greater than $5
million
|
|
$
|
6
|
|
|
$
|
10
|
|
|
(40
|
)
|
|
$
|
34
|
|
|
$
|
33
|
|
|
3
|
|
|
Current accident year losses $1 million - $5
million
|
|
75
|
|
|
46
|
|
|
63
|
|
|
152
|
|
|
122
|
|
|
25
|
|
|
Large loss prior accident year reserve
development
|
|
4
|
|
|
1
|
|
|
300
|
|
|
42
|
|
|
4
|
|
|
nm
|
|
|
Total large losses incurred
|
|
85
|
|
|
57
|
|
|
49
|
|
|
228
|
|
|
159
|
|
|
43
|
|
|
Losses incurred but not reported
|
|
(9
|
)
|
|
(7
|
)
|
|
29
|
|
|
(6
|
)
|
|
100
|
|
|
nm
|
|
|
Other losses excluding catastrophe losses
|
|
499
|
|
|
467
|
|
|
7
|
|
|
1,453
|
|
|
1,269
|
|
|
14
|
|
|
Catastrophe losses
|
|
104
|
|
|
53
|
|
|
96
|
|
|
319
|
|
|
249
|
|
|
28
|
|
|
Total losses incurred
|
|
$
|
679
|
|
|
$
|
570
|
|
|
19
|
|
|
$
|
1,994
|
|
|
$
|
1,777
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
|
|
|
|
Pt. Change
|
|
Current accident year losses greater than $5
million
|
|
0.5
|
%
|
|
0.9
|
%
|
|
(0.4
|
)
|
|
1.0
|
%
|
|
1.0
|
%
|
|
0.0
|
|
|
Current accident year losses $1 million - $5
million
|
|
6.4
|
|
|
4.1
|
|
|
2.3
|
|
|
4.3
|
|
|
3.6
|
|
|
0.7
|
|
|
Large loss prior accident year reserve
development
|
|
0.3
|
|
|
0.2
|
|
|
0.1
|
|
|
1.2
|
|
|
0.1
|
|
|
1.1
|
|
|
Total large loss ratio
|
|
7.2
|
|
|
5.2
|
|
|
2.0
|
|
|
6.5
|
|
|
4.7
|
|
|
1.8
|
|
|
Losses incurred but not reported
|
|
(0.7
|
)
|
|
(0.7
|
)
|
|
0.0
|
|
|
(0.2
|
)
|
|
3.0
|
|
|
(3.2
|
)
|
|
Other losses excluding catastrophe losses
|
|
41.7
|
|
|
41.3
|
|
|
0.4
|
|
|
41.2
|
|
|
38.1
|
|
|
3.1
|
|
|
Catastrophe losses
|
|
8.8
|
|
|
4.7
|
|
|
4.1
|
|
|
9.1
|
|
|
7.4
|
|
|
1.7
|
|
|
Total loss ratio
|
|
57.0
|
%
|
|
50.5
|
%
|
|
6.5
|
|
|
56.6
|
%
|
|
53.2
|
%
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We believe the inherent variability of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the variability in addition to general inflationary trends in loss costs. Our analysis continues to indicate no unexpected concentration of large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The third-quarter 2017 property casualty total large losses incurred of $85 million, net of reinsurance, were higher than the $51 million quarterly average during full-year 2016 and higher than the $57 million experienced for the third quarter of 2016. The ratio for these large losses was 2.0 percentage points higher compared with last year’s third quarter. The third-quarter 2017 amount of total large losses incurred helped contribute to the increase in the nine-month 2017 total large loss ratio, compared with 2016, in addition to a first-half 2017 ratio that was 1.5 points higher than the first half of 2016. We believe results for the three-month and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million. Losses by size are discussed in further detail in results of operations by property casualty insurance segment.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
43
FINANCIAL RESULTS
Consolidated results reflect the operating results of each of our five segments along with the parent company, Cincinnati Re and other activities reported as “Other.” The five segments are:
|
|
|
|
•
|
Commercial lines property casualty insurance
|
|
|
|
|
•
|
Personal lines property casualty insurance
|
|
|
|
|
•
|
Excess and surplus lines property casualty insurance
|
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
44
COMMERCIAL LINES INSURANCE RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Earned premiums
|
|
$
|
792
|
|
|
$
|
779
|
|
|
2
|
|
|
$
|
2,369
|
|
|
$
|
2,310
|
|
|
3
|
|
|
Fee revenues
|
|
1
|
|
|
1
|
|
|
0
|
|
|
3
|
|
|
3
|
|
|
0
|
|
|
Total revenues
|
|
793
|
|
|
780
|
|
|
2
|
|
|
2,372
|
|
|
2,313
|
|
|
3
|
|
|
Loss and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophe losses
|
|
486
|
|
|
460
|
|
|
6
|
|
|
1,439
|
|
|
1,357
|
|
|
6
|
|
|
Current accident year catastrophe losses
|
|
33
|
|
|
27
|
|
|
22
|
|
|
171
|
|
|
186
|
|
|
(8
|
)
|
|
Prior accident years before catastrophe losses
|
|
(14
|
)
|
|
(35
|
)
|
|
60
|
|
|
(40
|
)
|
|
(116
|
)
|
|
66
|
|
|
Prior accident years catastrophe losses
|
|
(4
|
)
|
|
4
|
|
|
nm
|
|
|
(15
|
)
|
|
(2
|
)
|
|
(650
|
)
|
|
Loss and loss expenses
|
|
501
|
|
|
456
|
|
|
10
|
|
|
1,555
|
|
|
1,425
|
|
|
9
|
|
|
Underwriting expenses
|
|
253
|
|
|
252
|
|
|
0
|
|
|
756
|
|
|
740
|
|
|
2
|
|
|
Underwriting profit
|
|
$
|
39
|
|
|
$
|
72
|
|
|
(46
|
)
|
|
$
|
61
|
|
|
$
|
148
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
|
|
|
|
Pt. Change
|
|
Current accident year before catastrophe losses
|
|
61.3
|
%
|
|
59.1
|
%
|
|
2.2
|
|
|
60.7
|
%
|
|
58.7
|
%
|
|
2.0
|
|
|
Current accident year catastrophe losses
|
|
4.3
|
|
|
3.5
|
|
|
0.8
|
|
|
7.2
|
|
|
8.1
|
|
|
(0.9
|
)
|
|
Prior accident years before catastrophe losses
|
|
(1.8
|
)
|
|
(4.5
|
)
|
|
2.7
|
|
|
(1.6
|
)
|
|
(5.0
|
)
|
|
3.4
|
|
|
Prior accident years catastrophe losses
|
|
(0.5
|
)
|
|
0.4
|
|
|
(0.9
|
)
|
|
(0.6
|
)
|
|
(0.1
|
)
|
|
(0.5
|
)
|
|
Loss and loss expenses
|
|
63.3
|
|
|
58.5
|
|
|
4.8
|
|
|
65.7
|
|
|
61.7
|
|
|
4.0
|
|
|
Underwriting expenses
|
|
31.9
|
|
|
32.3
|
|
|
(0.4
|
)
|
|
31.9
|
|
|
32.0
|
|
|
(0.1
|
)
|
|
Combined ratio
|
|
95.2
|
%
|
|
90.8
|
%
|
|
4.4
|
|
|
97.6
|
%
|
|
93.7
|
%
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
95.2
|
%
|
|
90.8
|
%
|
|
4.4
|
|
|
97.6
|
%
|
|
93.7
|
%
|
|
3.9
|
|
|
Contribution from catastrophe losses and prior
years reserve development
|
|
2.0
|
|
|
(0.6
|
)
|
|
2.6
|
|
|
5.0
|
|
|
3.0
|
|
|
2.0
|
|
|
Combined ratio before catastrophe losses and
prior years reserve development
|
|
93.2
|
%
|
|
91.4
|
%
|
|
1.8
|
|
|
92.6
|
%
|
|
90.7
|
%
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Performance highlights for the commercial lines segment include:
|
|
|
|
•
|
Premiums – Earned premiums and net written premiums for the commercial lines segment grew during the third quarter and first nine months of 2017, in part due to renewal premium growth that continued to reflect price increases and a higher level of insured exposures. Higher new business written premiums also contributed to the increase in net written premiums for the nine months ended September 30, 2017. The table below analyzes the primary components of premiums. We continue using predictive analytics tools to improve pricing precision and segmentation while also leveraging our local relationships with agents through the efforts of our teams that work closely with them. We seek to maintain appropriate pricing discipline for both new and renewal business as our agents and underwriters assess account quality to make careful decisions on a case-by-case basis whether to write or renew a policy.
|
Agency renewal written premiums grew 1 percent during third-quarter 2017 and 2 percent during the nine months ended September 30, 2017, compared with the same periods of 2016. The growth reflected price increases and improving economic conditions. During the third quarter of 2017, our overall standard commercial lines policies continued to average estimated renewal price increases at percentages in the low-single-digit range, similar to the second quarter of 2017. We continue to segment commercial lines policies, emphasizing identification and retention of policies we believe have relatively stronger pricing. Conversely, we have been seeking stricter renewal terms and conditions on policies we believe have relatively weaker pricing, in turn retaining fewer of those policies. We measure average changes in commercial lines renewal pricing as the percentage rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for the respective policies.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
45
Our average overall commercial lines renewal pricing change includes the impact of flat pricing for certain coverages within package policies written for a three-year term that were in force but did not expire during the period being measured. Therefore, the change in average commercial lines renewal pricing we report reflects
a blend of three-year policies that did not expire and other policies that did expire during the measurement period. For commercial lines policies that did expire and were then renewed during the third quarter of 2017, we estimate that our average percentage price increase for commercial auto continued in the high-single-digit range, higher in that range than second-quarter 2017. The estimated average percentage price change for our commercial property line of business was an increase in the mid-single-digit range and for commercial casualty it was an increase near the low end of the low-single-digit range. The estimated average percentage price change for workers’ compensation was a decrease in the mid-single-digit range.
Renewal premiums for our commercial casualty and workers’ compensation lines include the results of policy audits that adjust initial premium amounts based on differences between estimated and actual sales or payroll related to a specific policy. Audits completed during the first nine months of 2017 contributed $54 million to net written premiums.
New business written premiums for commercial lines decreased $2 million during the third quarter of 2017 and increased $20 million during the first nine months of 2017, compared with the same periods of 2016. The third-quarter total reflected a modest decrease for each major line of business in our commercial lines insurance segment except commercial property. The nine-month increase reflected growth for each major line of business except workers' compensation, which decreased by approximately $1 million. Trend analysis for year-over-year comparisons of individual quarters are more difficult to assess for commercial lines new business written premiums, due to inherent variability. That variability is often driven by larger policies with annual premiums greater than $100,000.
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our commercial lines insurance segment, ceded premium totals for the third quarter and first nine months of 2017 were similar to the same periods of 2016.
Commercial Lines Insurance Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Agency renewal written premiums
|
|
$
|
707
|
|
|
$
|
698
|
|
|
1
|
|
|
$
|
2,208
|
|
|
$
|
2,174
|
|
|
2
|
|
Agency new business written premiums
|
|
99
|
|
|
101
|
|
|
(2
|
)
|
|
301
|
|
|
281
|
|
|
7
|
|
Other written premiums
|
|
(28
|
)
|
|
(22
|
)
|
|
(27
|
)
|
|
(53
|
)
|
|
(54
|
)
|
|
2
|
|
Net written premiums
|
|
778
|
|
|
777
|
|
|
0
|
|
|
2,456
|
|
|
2,401
|
|
|
2
|
|
Unearned premium change
|
|
14
|
|
|
2
|
|
|
nm
|
|
|
(87
|
)
|
|
(91
|
)
|
|
4
|
|
Earned premiums
|
|
$
|
792
|
|
|
$
|
779
|
|
|
2
|
|
|
$
|
2,369
|
|
|
$
|
2,310
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
•
|
Combined ratio – The commercial lines combined ratio rose 4.4 percentage points for the third quarter and 3.9 points for the first nine months of 2017, compared with the same periods a year ago, largely due to lower amounts of favorable reserve development on prior accident years, discussed below. In addition, the current accident year loss and loss expenses ratio increased for our commercial casualty line of business, which represents approximately one-third of premiums for our commercial lines insurance segment. Commercial casualty paid losses and loss expenses for the third quarter of 2017 were higher than any quarter since the beginning of 2015, in part due to an increase in large losses discussed below. Although the ratio for our commercial casualty case incurred losses was approximately 2 percentage points better than the first half of 2017, it remained approximately 4 points worse than the average for the prior two years. After considering these trends, we maintained our consistently prudent approach to setting reserves with IBNR reserves that resulted in no favorable development on third-quarter 2017 commercial casualty prior accident year reserves and a nine-month commercial casualty current accident year loss and loss expenses ratio approximately 2 percentage points higher than full-year 2016.
|
The commercial lines ratio for current accident year loss and loss expenses before catastrophe losses rose in the first nine months of 2017. That 60.7 percent ratio increased 2.0 percentage points compared with the 58.7 percent accident year 2016 ratio measured as of September 30, 2016, including an increase of 0.5 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
46
Catastrophe losses and loss expenses accounted for 3.8 and 6.6 percentage points of the combined ratio for the third quarter and first nine months of 2017, compared with 3.9 and 8.0 percentage points for the same periods a year ago. The 10-year annual average for that catastrophe measure through 2016 for the commercial lines segment was 4.8 percentage points, and the five-year annual average was 5.2 percentage points.
Commercial auto, representing 19 percent of 2016 earned premiums for our commercial lines insurance segment, was the only major line of business in that segment with a third-quarter 2017 total loss and loss expense ratio before catastrophe losses significantly higher than we desired. As discussed above, during the first nine months of 2017, our commercial auto policies experienced average renewal price increases at percentages in the high-single-digit range, with the third quarter higher than the second quarter. We believe pricing and risk selection actions we are taking will help improve future profitability. Further segmentation of policies as they renew should also help improve profitability, as we seek more adequate pricing on individual policies that need it based on analytics and underwriter judgment. As an example, for our 2016 commercial auto policies that we determined have relatively weaker pricing, representing approximately one-third of commercial auto renewal written premiums, we obtained 2016 percentage price increases that averaged in the high-single digits. We also continued to improve premium rate classification and the use of other rating variables in risk selection and pricing.
The net effect of reserve development on prior accident years during the third quarter and first nine months of 2017 was favorable for commercial lines overall by $18 million and $55 million compared with $31 million and $118 million for the same periods in 2016. For the first nine months of 2017, our workers’ compensation line of business was the largest contributor to the total commercial lines net favorable reserve development on prior accident years, followed by other commercial lines, which was largely attributable to director and officer liability insurance. Commercial property also contributed to the total commercial lines net favorable reserve development. Those contributions were partially offset by unfavorable reserve development for our commercial auto and commercial casualty lines of business. The unfavorable reserve development for commercial casualty reflected higher than usual large loss activity for the first and third quarters of 2017. The net favorable reserve development recognized during the first nine months of 2017 for our commercial lines insurance segment was largely for accident year 2016 and accident years prior to 2014, and was primarily due to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2016 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 48.
The commercial lines underwriting expense ratio for the third quarter and first nine months of 2017 decreased, compared with the same periods of 2016, as earned premiums increased at a faster pace than underwriting expenses.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
47
Commercial Lines Insurance Losses Incurred by Size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, net of reinsurance)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Current accident year losses greater than $5
million
|
|
$
|
6
|
|
|
$
|
10
|
|
|
(40
|
)
|
|
$
|
34
|
|
|
$
|
33
|
|
|
3
|
|
|
Current accident year losses $1 million - $5
million
|
|
56
|
|
|
34
|
|
|
65
|
|
|
115
|
|
|
103
|
|
|
12
|
|
|
Large loss prior accident year reserve
development
|
|
1
|
|
|
5
|
|
|
(80
|
)
|
|
37
|
|
|
8
|
|
|
nm
|
|
|
Total large losses incurred
|
|
63
|
|
|
49
|
|
|
29
|
|
|
186
|
|
|
144
|
|
|
29
|
|
|
Losses incurred but not reported
|
|
1
|
|
|
4
|
|
|
(75
|
)
|
|
17
|
|
|
70
|
|
|
(76
|
)
|
|
Other losses excluding catastrophe losses
|
|
313
|
|
|
287
|
|
|
9
|
|
|
911
|
|
|
786
|
|
|
16
|
|
|
Catastrophe losses
|
|
27
|
|
|
28
|
|
|
(4
|
)
|
|
149
|
|
|
179
|
|
|
(17
|
)
|
|
Total losses incurred
|
|
$
|
404
|
|
|
$
|
368
|
|
|
10
|
|
|
$
|
1,263
|
|
|
$
|
1,179
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
|
|
|
|
Pt. Change
|
|
Current accident year losses greater than $5
million
|
|
0.8
|
%
|
|
1.3
|
%
|
|
(0.5
|
)
|
|
1.5
|
%
|
|
1.4
|
%
|
|
0.1
|
|
|
Current accident year losses $1 million - $5
million
|
|
7.2
|
|
|
4.4
|
|
|
2.8
|
|
|
4.8
|
|
|
4.4
|
|
|
0.4
|
|
|
Large loss prior accident year reserve
development
|
|
0.1
|
|
|
0.8
|
|
|
(0.7
|
)
|
|
1.6
|
|
|
0.4
|
|
|
1.2
|
|
|
Total large loss ratio
|
|
8.1
|
|
|
6.5
|
|
|
1.6
|
|
|
7.9
|
|
|
6.2
|
|
|
1.7
|
|
|
Losses incurred but not reported
|
|
—
|
|
|
0.4
|
|
|
(0.4
|
)
|
|
0.7
|
|
|
3.0
|
|
|
(2.3
|
)
|
|
Other losses excluding catastrophe losses
|
|
39.6
|
|
|
36.7
|
|
|
2.9
|
|
|
38.4
|
|
|
34.1
|
|
|
4.3
|
|
|
Catastrophe losses
|
|
3.4
|
|
|
3.7
|
|
|
(0.3
|
)
|
|
6.3
|
|
|
7.8
|
|
|
(1.5
|
)
|
|
Total loss ratio
|
|
51.1
|
%
|
|
47.3
|
%
|
|
3.8
|
|
|
53.3
|
%
|
|
51.1
|
%
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. The third-quarter 2017 commercial lines total large losses incurred of $63 million, net of reinsurance, were higher than the quarterly average of $48 million during full-year 2016 and higher than the $49 million total large losses incurred for the third quarter of 2016. The rise in commercial lines large losses for the third-quarter and first nine months of 2017 was largely due to our commercial casualty and commercial property lines of business. The third-quarter 2017 ratio for commercial lines total large losses was 1.6 percentage points higher compared with last year’s third-quarter ratio. The third-quarter 2017 amount of total large losses incurred helped contribute to the increase in the nine-month 2017 total large loss ratio, compared with 2016, in addition to a first-half 2017 ratio that was 1.6 points higher than the first half of 2016. We believe results for the three- and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
48
PERSONAL LINES INSURANCE RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Earned premiums
|
|
$
|
314
|
|
|
$
|
293
|
|
|
7
|
|
|
$
|
921
|
|
|
$
|
864
|
|
|
7
|
|
|
Fee revenues
|
|
1
|
|
|
1
|
|
|
0
|
|
|
4
|
|
|
3
|
|
|
33
|
|
|
Total revenues
|
|
315
|
|
|
294
|
|
|
7
|
|
|
925
|
|
|
867
|
|
|
7
|
|
|
Loss and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophe losses
|
|
196
|
|
|
186
|
|
|
5
|
|
|
586
|
|
|
546
|
|
|
7
|
|
|
Current accident year catastrophe losses
|
|
37
|
|
|
27
|
|
|
37
|
|
|
133
|
|
|
72
|
|
|
85
|
|
|
Prior accident years before catastrophe losses
|
|
2
|
|
|
6
|
|
|
(67
|
)
|
|
(9
|
)
|
|
(1
|
)
|
|
(800
|
)
|
|
Prior accident years catastrophe losses
|
|
(2
|
)
|
|
(2
|
)
|
|
0
|
|
|
(4
|
)
|
|
(3
|
)
|
|
(33
|
)
|
|
Loss and loss expenses
|
|
233
|
|
|
217
|
|
|
7
|
|
|
706
|
|
|
614
|
|
|
15
|
|
|
Underwriting expenses
|
|
91
|
|
|
85
|
|
|
7
|
|
|
267
|
|
|
253
|
|
|
6
|
|
|
Underwriting loss
|
|
$
|
(9
|
)
|
|
$
|
(8
|
)
|
|
13
|
|
|
$
|
(48
|
)
|
|
$
|
—
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
|
|
|
|
Pt. Change
|
|
Current accident year before catastrophe losses
|
|
62.2
|
%
|
|
63.7
|
%
|
|
(1.5
|
)
|
|
63.6
|
%
|
|
63.2
|
%
|
|
0.4
|
|
|
Current accident year catastrophe losses
|
|
11.7
|
|
|
8.9
|
|
|
2.8
|
|
|
14.5
|
|
|
8.3
|
|
|
6.2
|
|
|
Prior accident years before catastrophe losses
|
|
0.7
|
|
|
2.1
|
|
|
(1.4
|
)
|
|
(1.0
|
)
|
|
(0.1
|
)
|
|
(0.9
|
)
|
|
Prior accident years catastrophe losses
|
|
(0.6
|
)
|
|
(0.5
|
)
|
|
(0.1
|
)
|
|
(0.5
|
)
|
|
(0.3
|
)
|
|
(0.2
|
)
|
|
Loss and loss expenses
|
|
74.0
|
|
|
74.2
|
|
|
(0.2
|
)
|
|
76.6
|
|
|
71.1
|
|
|
5.5
|
|
|
Underwriting expenses
|
|
29.1
|
|
|
29.2
|
|
|
(0.1
|
)
|
|
29.0
|
|
|
29.3
|
|
|
(0.3
|
)
|
|
Combined ratio
|
|
103.1
|
%
|
|
103.4
|
%
|
|
(0.3
|
)
|
|
105.6
|
%
|
|
100.4
|
%
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
103.1
|
%
|
|
103.4
|
%
|
|
(0.3
|
)
|
|
105.6
|
%
|
|
100.4
|
%
|
|
5.2
|
|
|
Contribution from catastrophe losses and prior
years reserve development
|
|
11.8
|
|
|
10.5
|
|
|
1.3
|
|
|
13.0
|
|
|
7.9
|
|
|
5.1
|
|
|
Combined ratio before catastrophe losses and
prior years reserve development
|
|
91.3
|
%
|
|
92.9
|
%
|
|
(1.6
|
)
|
|
92.6
|
%
|
|
92.5
|
%
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Performance highlights for the personal lines segment include:
|
|
|
|
•
|
Premiums – Personal lines earned premiums and net written premiums for the third quarter and first nine months of 2017 continued to grow, reflecting increases in renewal written premiums and new business written premiums from agencies that represent us. Price increases and a high level of policy retention were the main drivers of renewal premium growth. The table below analyzes the primary components of premiums.
|
Agency renewal written premiums increased 5 percent for both the third quarter and first nine months of 2017, largely reflecting rate increases. We estimate that premium rates for our personal auto line of business increased at average percentages near the low end of the high-single-digit range during the first nine months of 2017. For our homeowner line of business, we estimate that premium rates for the first nine months of 2017 increased at average percentages near the low end of the mid-single-digit range. For both our personal auto and homeowner lines of business, some individual policies experienced lower or higher rate changes based on each risk's specific characteristics and enhanced pricing precision enabled by predictive models.
Personal lines new business written premiums grew $11 million or 34 percent during the third quarter and $31 million or 34 percent during the first nine months of 2017, compared with the same periods of 2016. That growth included approximately $9 million for the third quarter, and $22 million for the first nine months of 2017, from high net worth clients of our agencies. Personal lines new business written premiums from our high net worth policies totaled approximately $16 million for the third quarter and $42 million for the first nine months of 2017. The primary factors driving growth in the middle market portion included recent-year expansion into new states and other additional marketing efforts directed toward agencies. Marketing efforts included assisting agencies with processing qualified policies expiring from other insurance companies, sometimes referred to as
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
49
“book rolls”. Similar to recent years, such processing has not materially contributed to 2017 increases or decreases in personal lines new business written premiums.
Other written premiums include premiums ceded to reinsurers as part of our reinsurance ceded program. For our personal lines insurance segment, ceded premium totals for the third quarter and first nine months of 2017 were similar to the same periods of 2016.
We continue to implement strategies discussed in our 2016 Annual Report on Form 10-K, Item 1, Strategic Initiatives, Page 13, to enhance our responsiveness to marketplace changes and to help achieve our long-term objectives for personal lines growth and profitability. These strategies include initiatives to more profitably underwrite personal auto policies.
Personal Lines Insurance Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Agency renewal written premiums
|
|
$
|
318
|
|
|
$
|
303
|
|
|
5
|
|
|
$
|
881
|
|
|
$
|
841
|
|
|
5
|
|
|
Agency new business written premiums
|
|
43
|
|
|
32
|
|
|
34
|
|
|
122
|
|
|
91
|
|
|
34
|
|
|
Other written premiums
|
|
(6
|
)
|
|
(6
|
)
|
|
0
|
|
|
(18
|
)
|
|
(17
|
)
|
|
(6
|
)
|
|
Net written premiums
|
|
355
|
|
|
329
|
|
|
8
|
|
|
985
|
|
|
915
|
|
|
8
|
|
|
Unearned premium change
|
|
(41
|
)
|
|
(36
|
)
|
|
(14
|
)
|
|
(64
|
)
|
|
(51
|
)
|
|
(25
|
)
|
|
Earned premiums
|
|
$
|
314
|
|
|
$
|
293
|
|
|
7
|
|
|
$
|
921
|
|
|
$
|
864
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
•
|
Combined ratio – Our personal lines combined ratio for the third quarter of 2017 decreased 0.3 percentage points, compared with the same period a year ago. For the first nine months of 2017, compared with the same period of 2016, it rose 5.2 percentage points, driven by an increase of 6.0 percentage points in the ratio for weather-related natural catastrophe losses and loss expenses.
|
The personal lines ratio for current accident year loss and loss expenses before catastrophe losses rose in the first nine months of 2017. That 63.6 percent ratio increased 0.4 percentage points compared with the 63.2 percent accident year 2016 ratio measured as of September 30, 2016, including an increase of 2.2 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
In addition to the average rate increases discussed above, we continue to refine our pricing to better match premiums to the risk of loss on individual policies. Improved pricing precision and broad-based rate increases are expected to help position the combined ratio at a profitable level over the long term. In addition, greater geographic diversification is expected to reduce the volatility of homeowner loss ratios attributable to weather-related catastrophe losses over time.
Personal auto, representing 47 percent of 2016 earned premiums for our personal lines insurance segment, was the only major line of business in that segment with a third-quarter 2017 total loss and loss expense ratio before catastrophe losses significantly higher than we desired. As discussed above, during the first nine months of 2017, our personal auto policies experienced average renewal price increases at percentages near the low end of the high-single-digit range. We believe rate increases and other actions to improve pricing precision and reduce loss costs will improve future profitability.
Catastrophe losses and loss expenses accounted for 11.1 and 14.0 percentage points of the combined ratio for the third quarter and first nine months of 2017, compared with 8.4 and 8.0 percentage points for the same periods of 2016. The 10-year annual average catastrophe loss ratio through 2016 for the personal lines segment was 10.7 percentage points, and the five-year annual average was 9.3 percentage points.
The net effect of reserve development on prior accident years during the third quarter of 2017 was unfavorable for personal lines overall by less than $1 million, compared with an unfavorable $4 million for the same period in 2016. For the first nine months of 2017, total personal lines net reserve development was favorable by $13 million, compared with a favorable $4 million for the same period in 2016. Our homeowner and other personal lines of business were the largest contributors to the nine-month 2017 total personal lines net favorable reserve development on prior accident years, followed by personal auto. The favorable reserve development was due primarily to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2016 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 48.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
50
The underwriting expense ratio decreased slightly for the third quarter and first nine months of 2017, compared with the same periods of 2016, as earned premiums increased at a faster pace than underwriting expenses.
Personal Lines Insurance Losses Incurred by Size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, net of reinsurance)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Current accident year losses greater than $5
million
|
|
$
|
—
|
|
|
$
|
—
|
|
|
nm
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
nm
|
|
|
Current accident year losses $1 million - $5
million
|
|
19
|
|
|
10
|
|
|
90
|
|
|
37
|
|
|
16
|
|
|
131
|
|
|
Large loss prior accident year reserve
development
|
|
3
|
|
|
(3
|
)
|
|
nm
|
|
|
4
|
|
|
(4
|
)
|
|
nm
|
|
|
Total large losses incurred
|
|
22
|
|
|
7
|
|
|
nm
|
|
|
41
|
|
|
12
|
|
|
242
|
|
|
Losses incurred but not reported
|
|
(17
|
)
|
|
(9
|
)
|
|
89
|
|
|
(19
|
)
|
|
25
|
|
|
nm
|
|
|
Other losses excluding catastrophe losses
|
|
164
|
|
|
168
|
|
|
(2
|
)
|
|
472
|
|
|
442
|
|
|
7
|
|
|
Catastrophe losses
|
|
34
|
|
|
25
|
|
|
36
|
|
|
127
|
|
|
68
|
|
|
87
|
|
|
Total losses incurred
|
|
$
|
203
|
|
|
$
|
191
|
|
|
6
|
|
|
$
|
621
|
|
|
$
|
547
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
|
|
|
|
Pt. Change
|
|
Current accident year losses greater than $5
million
|
|
—
|
%
|
|
—
|
%
|
|
0.0
|
|
|
—
|
%
|
|
—
|
%
|
|
0.0
|
|
|
Current accident year losses $1 million - $5
million
|
|
6.0
|
|
|
3.5
|
|
|
2.5
|
|
|
4.0
|
|
|
1.8
|
|
|
2.2
|
|
|
Large loss prior accident year reserve
development
|
|
1.0
|
|
|
(1.1
|
)
|
|
2.1
|
|
|
0.4
|
|
|
(0.4
|
)
|
|
0.8
|
|
|
Total large loss ratio
|
|
7.0
|
|
|
2.4
|
|
|
4.6
|
|
|
4.4
|
|
|
1.4
|
|
|
3.0
|
|
|
Losses incurred but not reported
|
|
(5.3
|
)
|
|
(3.2
|
)
|
|
(2.1
|
)
|
|
(2.1
|
)
|
|
2.9
|
|
|
(5.0
|
)
|
|
Other losses excluding catastrophe losses
|
|
52.1
|
|
|
57.7
|
|
|
(5.6
|
)
|
|
51.3
|
|
|
51.2
|
|
|
0.1
|
|
|
Catastrophe losses
|
|
10.8
|
|
|
8.2
|
|
|
2.6
|
|
|
13.8
|
|
|
7.8
|
|
|
6.0
|
|
|
Total loss ratio
|
|
64.6
|
%
|
|
65.1
|
%
|
|
(0.5
|
)
|
|
67.4
|
%
|
|
63.3
|
%
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the third quarter of 2017, the personal lines total large loss ratio, net of reinsurance, was 4.6 percentage points higher than last year’s third quarter. The rise in personal lines large losses for the third-quarter and first nine months of 2017 was largely due to our homeowner line of business. The third-quarter 2017 amount of total large losses incurred helped contribute to the increase in the nine-month 2017 total large loss ratio, compared with 2016, in addition to a first-half 2017 ratio that was 2.2 points higher than the first half of 2016. We believe results for the three-month and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
51
EXCESS AND SURPLUS LINES INSURANCE RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Earned premiums
|
|
$
|
53
|
|
|
$
|
48
|
|
|
10
|
|
|
$
|
153
|
|
|
$
|
136
|
|
|
13
|
|
|
Fee revenues
|
|
—
|
|
|
1
|
|
|
nm
|
|
|
1
|
|
|
1
|
|
|
0
|
|
|
Total revenues
|
|
53
|
|
|
49
|
|
|
8
|
|
|
154
|
|
|
137
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year before catastrophe losses
|
|
26
|
|
|
27
|
|
|
(4
|
)
|
|
81
|
|
|
80
|
|
|
1
|
|
|
Current accident year catastrophe losses
|
|
1
|
|
|
—
|
|
|
nm
|
|
|
2
|
|
|
2
|
|
|
0
|
|
|
Prior accident years before catastrophe losses
|
|
(3
|
)
|
|
(12
|
)
|
|
(75
|
)
|
|
(25
|
)
|
|
(27
|
)
|
|
7
|
|
|
Prior accident years catastrophe losses
|
|
—
|
|
|
—
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
0
|
|
|
Loss and loss expenses
|
|
24
|
|
|
15
|
|
|
60
|
|
|
58
|
|
|
55
|
|
|
5
|
|
|
Underwriting expenses
|
|
16
|
|
|
14
|
|
|
14
|
|
|
46
|
|
|
40
|
|
|
15
|
|
|
Underwriting profit
|
|
$
|
13
|
|
|
$
|
20
|
|
|
(35
|
)
|
|
$
|
50
|
|
|
$
|
42
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
|
|
|
|
Pt. Change
|
|
Current accident year before catastrophe losses
|
|
49.1
|
%
|
|
57.2
|
%
|
|
(8.1
|
)
|
|
52.8
|
%
|
|
58.9
|
%
|
|
(6.1
|
)
|
|
Current accident year catastrophe losses
|
|
1.7
|
|
|
0.2
|
|
|
1.5
|
|
|
1.3
|
|
|
1.3
|
|
|
0.0
|
|
|
Prior accident years before catastrophe losses
|
|
(4.7
|
)
|
|
(25.5
|
)
|
|
20.8
|
|
|
(15.9
|
)
|
|
(19.6
|
)
|
|
3.7
|
|
|
Prior accident years catastrophe losses
|
|
(0.3
|
)
|
|
0.0
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
0.0
|
|
|
Loss and loss expenses
|
|
45.8
|
|
|
31.9
|
|
|
13.9
|
|
|
38.1
|
|
|
40.5
|
|
|
(2.4
|
)
|
|
Underwriting expenses
|
|
29.0
|
|
|
29.4
|
|
|
(0.4
|
)
|
|
29.9
|
|
|
29.4
|
|
|
0.5
|
|
|
Combined ratio
|
|
74.8
|
%
|
|
61.3
|
%
|
|
13.5
|
|
|
68.0
|
%
|
|
69.9
|
%
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
74.8
|
%
|
|
61.3
|
%
|
|
13.5
|
|
|
68.0
|
%
|
|
69.9
|
%
|
|
(1.9
|
)
|
|
Contribution from catastrophe losses and prior
years reserve development
|
|
(3.3
|
)
|
|
(25.3
|
)
|
|
22.0
|
|
|
(14.7
|
)
|
|
(18.4
|
)
|
|
3.7
|
|
|
Combined ratio before catastrophe losses and
prior years reserve development
|
|
78.1
|
%
|
|
86.6
|
%
|
|
(8.5
|
)
|
|
82.7
|
%
|
|
88.3
|
%
|
|
(5.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Performance highlights for the excess and surplus lines segment include:
|
|
|
|
•
|
Premiums – Excess and surplus lines net written premiums continued to grow, primarily due to increases in renewal written premiums, during the third quarter and first nine months of 2017.
|
Renewal written premiums rose 11 percent and 15 percent for the three and nine months ended September 30, 2017, compared with the same periods of 2016, reflecting the opportunity to renew many accounts for the first time, as well as higher renewal pricing. For the first nine months of 2017, excess and surplus lines policy renewals experienced estimated average price increases at percentages in the low-single-digit range. We measure average changes in excess and surplus lines renewal pricing as the percentage rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies.
New business written premiums produced by agencies increased 16 percent for the first nine months of 2017, compared with the same period of 2016, reflecting an increase in our marketing efforts as we continued to carefully underwrite each policy in a highly competitive market. Some of what we report as new business came from accounts that were not new to our agents. We believe our agents’ seasoned accounts tend to be priced more accurately than business that may be less familiar to them.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
52
Excess and Surplus Lines Insurance Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Agency renewal written premiums
|
|
$
|
39
|
|
|
$
|
35
|
|
|
11
|
|
|
$
|
122
|
|
|
$
|
106
|
|
|
15
|
|
|
Agency new business written premiums
|
|
15
|
|
|
16
|
|
|
(6
|
)
|
|
52
|
|
|
45
|
|
|
16
|
|
|
Other written premiums
|
|
(3
|
)
|
|
(3
|
)
|
|
0
|
|
|
(9
|
)
|
|
(7
|
)
|
|
(29
|
)
|
|
Net written premiums
|
|
51
|
|
|
48
|
|
|
6
|
|
|
165
|
|
|
144
|
|
|
15
|
|
|
Unearned premium change
|
|
2
|
|
|
—
|
|
|
nm
|
|
|
(12
|
)
|
|
(8
|
)
|
|
(50
|
)
|
|
Earned premiums
|
|
$
|
53
|
|
|
$
|
48
|
|
|
10
|
|
|
$
|
153
|
|
|
$
|
136
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
•
|
Combined ratio – The excess and surplus lines combined ratio increased by 13.5 percentage points for the third quarter of 2017, compared with the same period of 2016, primarily due to less favorable reserve development on prior accident years. For the first nine months of 2017, the combined ratio improved by 1.9 percentage points, compared with the first nine months of 2016, driven by a lower ratio for current accident year losses and loss expenses before catastrophe losses.
|
The excess and surplus lines ratio for current accident year loss and loss expenses before catastrophe losses improved in the first nine months of 2017. That 52.8 percent ratio decreased 6.1 percentage points compared with the 58.9 percent accident year 2016 ratio measured as of September 30, 2016, including a decrease of 2.3 percentage points in the ratio for large losses of $1 million or more per claim, discussed below.
Excess and surplus lines net favorable reserve development on prior accident years, as a ratio to earned premiums, was 5.0 percent and 16.0 percent for the third quarter and first nine months of 2017, compared with 25.5 percent and 19.7 percent for the same periods of 2016. Approximately two-thirds of the net favorable reserve development recognized during the first nine months of 2017 was attributable to accident years 2015 and 2014. The favorable reserve development was due primarily to lower-than-anticipated loss emergence on known claims. Reserve estimates are inherently uncertain as described in our 2016 Annual Report on Form 10-K, Item 7, Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 48.
The underwriting expense ratio for the third quarter of 2017 decreased, compared with the same period of 2016, reflecting higher earned premiums, ongoing expense management efforts and a lower level of profit-sharing commissions for agencies. For the first nine months of 2017, the underwriting expense ratio increased, compared with the same period of 2016, primarily due to strategic investments that include enhancement of underwriting expertise, such as upgrades to systems used in underwriting or billing excess and surplus lines insurance policies.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
53
Excess and Surplus Lines Insurance Losses Incurred by Size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, net of reinsurance)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Current accident year losses greater than $5
million
|
|
$
|
—
|
|
|
$
|
—
|
|
|
nm
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
nm
|
|
|
Current accident year losses $1 million - $5
million
|
|
—
|
|
|
2
|
|
|
(100
|
)
|
|
—
|
|
|
3
|
|
|
(100
|
)
|
|
Large loss prior accident year reserve
development
|
|
—
|
|
|
(1
|
)
|
|
nm
|
|
|
1
|
|
|
—
|
|
|
nm
|
|
|
Total large losses incurred
|
|
—
|
|
|
1
|
|
|
(100
|
)
|
|
1
|
|
|
3
|
|
|
(67
|
)
|
|
Losses incurred but not reported
|
|
7
|
|
|
(2
|
)
|
|
nm
|
|
|
(4
|
)
|
|
5
|
|
|
nm
|
|
|
Other losses excluding catastrophe losses
|
|
8
|
|
|
11
|
|
|
(27
|
)
|
|
35
|
|
|
25
|
|
|
40
|
|
|
Catastrophe losses
|
|
1
|
|
|
—
|
|
|
nm
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
Total losses incurred
|
|
$
|
16
|
|
|
$
|
10
|
|
|
60
|
|
|
$
|
34
|
|
|
$
|
35
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios as a percent of earned premiums:
|
|
|
|
|
|
Pt. Change
|
|
|
|
|
|
Pt. Change
|
|
Current accident year losses greater than $5
million
|
|
—
|
%
|
|
—
|
%
|
|
0.0
|
|
|
—
|
%
|
|
—
|
%
|
|
0.0
|
|
|
Current accident year losses $1 million - $5
million
|
|
—
|
|
|
4.4
|
|
|
(4.4
|
)
|
|
—
|
|
|
2.3
|
|
|
(2.3
|
)
|
|
Large loss prior accident year reserve
development
|
|
(0.3
|
)
|
|
(2.0
|
)
|
|
1.7
|
|
|
0.6
|
|
|
(0.3
|
)
|
|
0.9
|
|
|
Total large loss ratio
|
|
(0.3
|
)
|
|
2.4
|
|
|
(2.7
|
)
|
|
0.6
|
|
|
2.0
|
|
|
(1.4
|
)
|
|
Losses incurred but not reported
|
|
13.8
|
|
|
(2.9
|
)
|
|
16.7
|
|
|
(2.4
|
)
|
|
4.1
|
|
|
(6.5
|
)
|
|
Other losses excluding catastrophe losses
|
|
15.3
|
|
|
21.8
|
|
|
(6.5
|
)
|
|
23.1
|
|
|
18.4
|
|
|
4.7
|
|
|
Catastrophe losses
|
|
1.3
|
|
|
0.1
|
|
|
1.2
|
|
|
1.1
|
|
|
1.1
|
|
|
0.0
|
|
|
Total loss ratio
|
|
30.1
|
%
|
|
21.4
|
%
|
|
8.7
|
|
|
22.4
|
%
|
|
25.6
|
%
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continue to monitor new losses and case reserve increases greater than $1 million for trends in factors such as initial reserve levels, loss cost inflation and claim settlement expenses. Our analysis continues to indicate no unexpected concentration of these large losses and case reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. In the third quarter of 2017, the excess and surplus lines total ratio for large losses, net of reinsurance, was 2.7 percentage points lower than last year’s third quarter. The third-quarter 2017 amount of total large losses incurred helped contribute to the decrease in the nine-month 2017 total large loss ratio, compared with 2016, in addition to a first-half 2017 ratio that was 0.7 points lower than the first half of 2016. We believe results for the three-month and nine-month periods largely reflected normal fluctuations in loss patterns and normal variability in large case reserves for claims above $1 million.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
54
LIFE INSURANCE RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Earned premiums
|
|
$
|
56
|
|
|
$
|
58
|
|
|
(3
|
)
|
|
$
|
173
|
|
|
$
|
175
|
|
|
(1
|
)
|
|
Fee revenues
|
|
1
|
|
|
2
|
|
|
(50
|
)
|
|
4
|
|
|
4
|
|
|
0
|
|
|
Total revenues
|
|
57
|
|
|
60
|
|
|
(5
|
)
|
|
177
|
|
|
179
|
|
|
(1
|
)
|
|
Contract holders' benefits incurred
|
|
59
|
|
|
63
|
|
|
(6
|
)
|
|
184
|
|
|
188
|
|
|
(2
|
)
|
|
Investment interest credited to contract holders'
|
|
(24
|
)
|
|
(23
|
)
|
|
(4
|
)
|
|
(70
|
)
|
|
(67
|
)
|
|
(4
|
)
|
|
Underwriting expenses incurred
|
|
26
|
|
|
24
|
|
|
8
|
|
|
63
|
|
|
62
|
|
|
2
|
|
|
Total benefits and expenses
|
|
61
|
|
|
64
|
|
|
(5
|
)
|
|
177
|
|
|
183
|
|
|
(3
|
)
|
|
Life insurance segment loss
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
0
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Performance highlights for the life insurance segment include:
|
|
|
|
•
|
Revenues – Revenues decreased for the nine months ended September 30, 2017, primarily due to lower earned premiums from universal life and other life insurance products, partially offset by higher earned premiums from term life insurance, our largest life insurance product line. The decline in universal life insurance premiums was attributable to the unlocking of actuarial assumptions
that slowed amortization of unearned front-end loads.
|
Net in-force life insurance policy face amounts increased to $60.094 billion at September 30, 2017, from $56.808 billion at year-end 2016.
Fixed annuity deposits received for the three and nine months ended September 30, 2017, were $6 million and $23 million compared with $10 million and $36 million for same periods of 2016. Fixed annuity deposits have a minimal impact to earned premiums because deposits received are initially recorded as liabilities. Profit is earned over time by way of interest-rate spreads. We do not write variable or equity-indexed annuities.
Life Insurance Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Term life insurance
|
|
$
|
39
|
|
|
$
|
37
|
|
|
5
|
|
|
$
|
118
|
|
|
$
|
112
|
|
|
5
|
|
|
Universal life insurance
|
|
7
|
|
|
13
|
|
|
(46
|
)
|
|
28
|
|
|
34
|
|
|
(18
|
)
|
|
Other life insurance, annuity and disability
income products
|
|
10
|
|
|
8
|
|
|
25
|
|
|
27
|
|
|
29
|
|
|
(7
|
)
|
|
Net earned premiums
|
|
$
|
56
|
|
|
$
|
58
|
|
|
(3
|
)
|
|
$
|
173
|
|
|
$
|
175
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
•
|
Profitability – Our life insurance segment typically reports a small profit or loss on a GAAP basis because profits from investment income spreads are included in our investment segment results. We include only investment income credited to contract holders (including interest assumed in life insurance policy reserve calculations) in our life insurance segment results. A loss of less than $1 million for our life insurance segment in the first nine months of 2017, compared with a loss of $4 million for the same period of 2016, was largely due to more favorable mortality results.
|
Life insurance segment benefits and expenses consist principally of contract holders’ (policyholders’) benefits incurred related to traditional life and interest-sensitive products and operating expenses incurred, net of deferred acquisition costs. Total benefits decreased in the first nine months of 2017. Life policy and investment contract reserves increased with continued growth in net in-force life insurance policy face amounts. Mortality results decreased from the same period of 2016 and were less than our 2017 projections.
Underwriting expenses for the first nine months of 2017 increased slightly compared with the same period a year ago. For the first nine months of 2017, unlocking of interest rate and other actuarial assumptions had an
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
55
immaterial impact on the amount of expenses deferred to future periods. For the first nine months of 2016, unlocking decreased the amount of expenses deferred to future periods, increasing underwriting expenses.
We recognize that assets under management, capital appreciation and investment income are integral to evaluating the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and realized gains or losses from life-insurance-related invested assets, the life insurance company reported a net profit of $8 million and $33 million in the three and nine months ended September 30, 2017, compared with a net profit of $10 million and $32 million for the same periods of 2016. The life insurance company portfolio had net after-tax realized investment gains of less than $1 million and $2 million for the three and nine months ended September 30, 2017, compared with $2 million and $3 million of net after-tax realized investment gains for the three and nine months ended September 30, 2016.
INVESTMENTS RESULTS
Overview
The investments segment contributes investment income and realized gains and losses to results of operations. Investments traditionally are our primary source of pretax and after-tax profits.
Investment Income
Pretax investment income increased 3 percent for third-quarter 2017 and 2 percent for the nine months ended September 30, 2017, compared with the same periods of 2016. Interest income rose due to net purchases of fixed-maturity securities that offset the continuing effects of the low interest rate environment. Higher dividend income reflected rising dividend rates and net purchases of equity securities.
Investments Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Total investment income, net of expenses
|
|
$
|
153
|
|
|
$
|
148
|
|
|
3
|
|
|
$
|
453
|
|
|
$
|
442
|
|
|
2
|
|
|
Investment interest credited to contract holders'
|
|
(24
|
)
|
|
(23
|
)
|
|
(4
|
)
|
|
(70
|
)
|
|
(67
|
)
|
|
(4
|
)
|
|
Realized investment gains, net
|
|
7
|
|
|
56
|
|
|
nm
|
|
|
156
|
|
|
161
|
|
|
(3
|
)
|
|
Investments profit, pretax
|
|
$
|
136
|
|
|
$
|
181
|
|
|
(25
|
)
|
|
$
|
539
|
|
|
$
|
536
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continue to position our portfolio considering both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield. The table below shows the average pretax yield-to-amortized cost associated with expected principal redemptions for our fixed-maturity portfolio. The expected principal redemptions are based on par amounts and include dated maturities, calls and prefunded municipal bonds that we expect will be called during each respective time period.
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
% Yield
|
|
Principal redemptions
|
|
At September 30, 2017
|
|
|
Fixed-maturity pretax yield profile:
|
|
|
|
|
Expected to mature during the remainder of 2017
|
5.30
|
|
$
|
125
|
|
|
Expected to mature during 2018
|
5.69
|
|
916
|
|
|
Expected to mature during 2019
|
6.15
|
|
734
|
|
|
Average yield and total expected redemptions from the remainder of 2017 through 2019
|
5.85
|
|
$
|
1,775
|
|
|
|
|
|
|
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
56
The table below shows the average pretax yield-to-amortized cost for fixed-maturity securities acquired during the periods indicated. The average yield for total fixed-maturity securities acquired during the first nine months of 2017 was lower than the 4.54 percent average yield-to-amortized cost of the fixed-maturity securities portfolio at the end of 2016. Our fixed-maturity portfolio's average yield of 4.47 percent for the first nine months of 2017, from the investment income table below, was also lower than that yield for the year-end 2016 fixed-maturities portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Average pretax yield-to-amortized cost on new
fixed-maturities:
|
|
|
|
|
|
|
|
|
Acquired taxable fixed-maturities
|
3.81
|
%
|
|
3.73
|
%
|
|
4.00
|
%
|
|
4.27
|
%
|
|
Acquired tax-exempt fixed-maturities
|
3.15
|
|
|
2.66
|
|
|
3.34
|
|
|
2.89
|
|
|
Average total fixed-maturities acquired
|
3.55
|
|
|
3.39
|
|
|
3.68
|
|
|
3.86
|
|
|
|
|
|
|
|
|
|
|
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. In our 2016 Annual Report on Form 10-K, Item 1, Investments Segment, Page 23, and Item 7, Investments Outlook, Page 86, we discussed our portfolio strategies. We discuss risks related to our investment income and our fixed-maturity and equity investment portfolios in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk.
The table below provides details about investment income. Average yields in this table are based on the average invested asset and cash amounts indicated in the table, using fixed-maturity securities valued at amortized cost and all other securities at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
112
|
|
|
$
|
111
|
|
|
1
|
|
$
|
334
|
|
|
$
|
330
|
|
|
1
|
|
Dividends
|
|
43
|
|
|
39
|
|
|
10
|
|
124
|
|
|
117
|
|
|
6
|
|
Other
|
|
1
|
|
|
1
|
|
|
0
|
|
3
|
|
|
2
|
|
|
50
|
|
Less investment expenses
|
|
3
|
|
|
3
|
|
|
0
|
|
8
|
|
|
7
|
|
|
14
|
|
Investment income, pretax
|
|
153
|
|
|
148
|
|
|
3
|
|
453
|
|
|
442
|
|
|
2
|
|
Less income taxes
|
|
35
|
|
|
35
|
|
|
0
|
|
106
|
|
|
105
|
|
|
1
|
|
Total investment income, after-tax
|
|
$
|
118
|
|
|
$
|
113
|
|
|
4
|
|
$
|
347
|
|
|
$
|
337
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment returns:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average invested assets plus cash and cash
equivalents
|
|
$
|
16,769
|
|
|
$
|
15,564
|
|
|
|
|
$
|
16,462
|
|
|
$
|
15,192
|
|
|
|
|
Average yield pretax
|
|
3.65
|
%
|
|
3.80
|
%
|
|
|
|
3.67
|
%
|
|
3.88
|
%
|
|
|
|
Average yield after-tax
|
|
2.81
|
|
|
2.90
|
|
|
|
|
2.81
|
|
|
2.96
|
|
|
|
|
Effective tax rate
|
|
23.4
|
|
|
23.9
|
|
|
|
|
23.5
|
|
|
23.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity returns:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average amortized cost
|
|
$
|
10,121
|
|
|
$
|
9,588
|
|
|
|
|
$
|
9,967
|
|
|
$
|
9,491
|
|
|
|
|
Average yield pretax
|
|
4.43
|
%
|
|
4.63
|
%
|
|
|
|
4.47
|
%
|
|
4.64
|
%
|
|
|
|
Average yield after-tax
|
|
3.25
|
|
|
3.37
|
|
|
|
|
3.27
|
|
|
3.37
|
|
|
|
|
Effective tax rate
|
|
26.6
|
|
|
27.3
|
|
|
|
|
26.8
|
|
|
27.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
57
Net Realized Gains and Losses
We reported net realized investment gains of $7 million and $156 million for the three and nine months ended September 30, 2017, compared with $56 million and $161 million of net realized investment gains for the same periods of 2016. The total net realized investment gains for the first nine months of 2017 included $143 million in net gains from sales of various common and preferred stock holdings, compared with $146 million for the same period of 2016.
Investment gains or losses are recognized upon the sales of investments or as otherwise required under GAAP. The timing of realized gains or losses from sales can have a material effect on results in any quarter. 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, with the unrealized gain or loss included as a component of accumulated other comprehensive income (AOCI). Accounting requirements for other-than-temporary impairment (OTTI) charges for the fixed-maturity portfolio are disclosed in our 2016 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 122.
Of the 3,484 securities in the portfolio, no securities were trading below 70 percent of amortized cost at September 30, 2017. Our asset impairment committee regularly monitors the portfolio, including a quarterly review of the entire portfolio for potential OTTI charges. We believe that if liquidity in the markets were to significantly deteriorate or economic conditions were to significantly weaken, we could experience declines in portfolio values and possibly additional OTTI charges.
The table below provides additional detail for OTTI charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
Banking
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
Total fixed maturities
|
|
—
|
|
|
—
|
|
|
6
|
|
|
2
|
|
|
Common equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
Total common equities
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
We report as Other the noninvestment operations of the parent company and a noninsurance subsidiary, CFC Investment Company. We also report as Other the underwriting results of Cincinnati Re, our reinsurance assumed operation, including earned premiums, loss and loss expenses and underwriting expenses.
Total revenues for the first nine months of 2017 for our Other operations increased, compared with the same period of 2016, primarily due to earned premiums from Cincinnati Re. Total expenses for Other also increased for the first nine months of 2017, primarily due to losses and loss expenses and underwriting expenses from Cincinnati Re.
Other loss in the table below represents losses before income taxes. The net result of Cincinnati Re for the first nine months of 2017 was an underwriting loss of approximately $23 million, largely due to an increase in losses from natural catastrophes. For both periods shown, Other loss resulted largely from underwriting results for Cincinnati Re and interest expense from debt of the parent company.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Interest and fees on loans and leases
|
|
$
|
1
|
|
|
$
|
2
|
|
|
(50
|
)
|
|
$
|
3
|
|
|
$
|
4
|
|
|
(25
|
)
|
|
Earned premiums
|
|
32
|
|
|
13
|
|
|
146
|
|
|
80
|
|
|
33
|
|
|
142
|
|
|
Other revenues
|
|
1
|
|
|
—
|
|
|
nm
|
|
|
1
|
|
|
1
|
|
|
0
|
|
|
Total revenues
|
|
34
|
|
|
15
|
|
|
127
|
|
|
84
|
|
|
38
|
|
|
121
|
|
|
Interest expense
|
|
13
|
|
|
13
|
|
|
0
|
|
|
39
|
|
|
39
|
|
|
0
|
|
|
Loss and loss expenses
|
|
57
|
|
|
2
|
|
|
nm
|
|
|
78
|
|
|
16
|
|
|
388
|
|
|
Underwriting expenses
|
|
7
|
|
|
5
|
|
|
40
|
|
|
25
|
|
|
11
|
|
|
127
|
|
|
Operating expenses
|
|
3
|
|
|
3
|
|
|
0
|
|
|
11
|
|
|
10
|
|
|
10
|
|
|
Total expenses
|
|
80
|
|
|
23
|
|
|
248
|
|
|
153
|
|
|
76
|
|
|
101
|
|
|
Other loss
|
|
$
|
(46
|
)
|
|
$
|
(8
|
)
|
|
(475
|
)
|
|
$
|
(69
|
)
|
|
$
|
(38
|
)
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAXES
We had $27 million and $130 million of income tax expense for the three and nine months ended September 30, 2017, compared with $73 million and $193 million for the same periods of 2016. The effective tax rates for the three and nine months ended September 30, 2017, were 20.9 percent and 24.4 percent compared with 28.9 percent and 28.2 percent for the same periods last year. The change in our effective tax rate was primarily due to changes in pretax income from underwriting results and realized investment gains and losses, with immaterial changes in the amount of permanent book-tax differences. For the three and nine months ended September 30, 2017, the change in our effective tax rate also reflected the adoption of ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
.
Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See Tax-Exempt Fixed Maturities in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk for further discussion on municipal bond purchases in our fixed-maturity investment portfolio. For our property casualty insurance subsidiaries, approximately 85 percent of interest from tax-advantaged fixed-maturity investments and approximately 60 percent of dividends from qualified equities are exempt from federal tax after applying proration from the 1986 Tax Reform Act. Our noninsurance companies own an immaterial amount of tax-advantaged fixed-maturity investments. For our noninsurance companies, the dividend received deduction exempts 70 percent of dividends from qualified equities. Our life insurance company does not own tax-advantaged fixed-maturity investments or equities subject to the dividend received deduction. Details about our effective tax rate are in this quarterly report Item 1, Note 9 – Income Taxes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2017, shareholders’ equity was $7.523 billion, compared with $7.060 billion at December 31, 2016. Total debt was $804 million at September 30, 2017, down $3 million from December 31, 2016. At September 30, 2017, cash and cash equivalents totaled $674 million, compared with $777 million at December 31, 2016.
SOURCES OF LIQUIDITY
Subsidiary Dividends
Our lead insurance subsidiary declared dividends of $290 million to the parent company in the first nine months of 2017, compared with $300 million for the same period of 2016. For full-year 2016, subsidiary dividends declared totaled $475 million. State of Ohio regulatory requirements restrict the dividends our insurance subsidiary can pay. For full-year 2017, total dividends that our insurance subsidiary could pay to our parent company without regulatory approval are approximately $469 million.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
59
Investing Activities
Investment income is a source of liquidity for both the parent company and its insurance subsidiary. We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth.
Parent company obligations can be funded with income on investments held at the parent-company level or through sales of securities in that portfolio, although our investment philosophy seeks to compound cash flows over the long term. These sources of capital can help minimize subsidiary dividends to the parent company, protecting insurance subsidiary capital.
See our 2016 Annual Report on Form 10-K, Item 1, Investments Segment, Page 23, for a discussion of our historic investment strategy, portfolio allocation and quality.
Insurance Underwriting
Our property casualty and life insurance underwriting operations provide liquidity because we generally receive premiums before paying losses under the policies purchased with those premiums. After satisfying our cash requirements, we use excess cash flows for investment, increasing future investment income.
Historically, cash receipts from property casualty and life insurance premiums, along with investment income, have been more than sufficient to pay claims, operating expenses and dividends to the parent company.
The table below shows a summary of operating cash flow for property casualty insurance (direct method):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
2017
|
|
2016
|
|
% Change
|
|
2017
|
|
2016
|
|
% Change
|
|
Premiums collected
|
|
$
|
1,217
|
|
|
$
|
1,185
|
|
|
3
|
|
|
$
|
3,723
|
|
|
$
|
3,534
|
|
|
5
|
|
|
Loss and loss expenses paid
|
|
(725
|
)
|
|
(662
|
)
|
|
(10
|
)
|
|
(2,114
|
)
|
|
(1,853
|
)
|
|
(14
|
)
|
|
Commissions and other underwriting expenses
paid
|
|
(333
|
)
|
|
(318
|
)
|
|
(5
|
)
|
|
(1,163
|
)
|
|
(1,081
|
)
|
|
(8
|
)
|
|
Cash flow from underwriting
|
|
159
|
|
|
205
|
|
|
(22
|
)
|
|
446
|
|
|
600
|
|
|
(26
|
)
|
|
Investment income received
|
|
108
|
|
|
105
|
|
|
3
|
|
|
310
|
|
|
303
|
|
|
2
|
|
|
Cash flow from operations
|
|
$
|
267
|
|
|
$
|
310
|
|
|
(14
|
)
|
|
$
|
756
|
|
|
$
|
903
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collected premiums for property casualty insurance rose $189 million during the first nine months of 2017, compared with the same period in 2016. Loss and loss expenses paid increased $261 million, including a $103 million increase for catastrophe losses and loss expenses. Commissions and other underwriting expenses paid rose $82 million, primarily due to higher commissions paid to agencies, reflecting the increase in collected premiums.
We discuss our future obligations for claims payments and for underwriting expenses in our 2016 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 91, and Other Commitments also on Page 91.
Capital Resources
At September 30, 2017, our debt-to-total-capital ratio was 9.7 percent, with $787 million in long-term debt and $17 million in borrowing on our revolving short-term line of credit. That line of credit had a $20 million balance at December 31, 2016. At September 30, 2017, $208 million was available for future cash management needs. Based on our capital requirements at September 30, 2017, we do not anticipate a material increase in debt levels during the remainder of 2017. As a result, we expect changes in our debt-to-total-capital ratio to continue to be largely a function of the contribution of unrealized investment gains or losses to shareholders’ equity.
We provide details of our three, long-term notes in this quarterly report Item 1, Note 3 – Fair Value Measurements. None of the notes are encumbered by rating triggers.
Four independent ratings firms award insurer financial strength ratings to our property casualty insurance companies and three firms rate our life insurance company. Those firms made no changes to our parent company
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
60
debt ratings during the first nine months of 2017. Our debt ratings are discussed in our 2016 Annual Report on Form 10-K, Item 7, Liquidity and Capital Resources, Other Sources of Liquidity, Page 89.
Off-Balance Sheet Arrangements
We do not use any special-purpose financing vehicles or have any undisclosed off-balance sheet arrangements (as that term is defined in applicable SEC rules) that are reasonably likely to have a current or future material effect on the company’s financial condition, results of operation, liquidity, capital expenditures or capital resources. Similarly, the company holds no fair-value contracts for which a lack of marketplace quotations would necessitate the use of fair-value techniques.
USES OF LIQUIDITY
Our parent company and insurance subsidiary have contractual obligations and other commitments. In addition, one of our primary uses of cash is to enhance shareholder return.
Contractual Obligations
In our 2016 Annual Report on Form 10-K, Item 7, Contractual Obligations, Page 91, we estimated our future contractual obligations as of December 31, 2016. There have been no material changes to our estimates of future contractual obligations since our 2016 Annual Report on Form 10-K.
Other Commitments
In addition to our contractual obligations, we have other property casualty operational commitments.
|
|
|
|
•
|
Commissions – Commissions paid were $708 million in the first nine months of 2017. Commission payments generally track with written premiums, except for annual profit-sharing commissions typically paid during the first quarter of the year.
|
|
|
|
|
•
|
Other underwriting expenses – Many of our underwriting expenses are not contractual obligations, but reflect the ongoing expenses of our business. Noncommission underwriting expenses paid were $455 million in the first nine months of 2017.
|
|
|
|
|
•
|
Technology costs – In addition to contractual obligations for hardware and software, we anticipate capitalizing up to $7 million in spending for key technology initiatives in 2017. Capitalized development costs related to key technology initiatives were $6 million in the first nine months of 2017. These activities are conducted at our discretion, and we have no material contractual obligations for activities planned as part of these projects.
|
We contributed $5 million to our qualified pension plan during the first nine months of 2017.
Investing Activities
After fulfilling operating requirements, we invest cash flows from underwriting, investment and other corporate activities in fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We discuss our investment strategy and certain portfolio attributes in this quarterly report Item 3, Quantitative and Qualitative Disclosures About Market Risk.
Uses of Capital
Uses of cash to enhance shareholder return include dividends to shareholders. In January, May and August 2017, the board of directors declared regular quarterly cash dividends of 50 cents per share for an indicated annual rate of $2.00 per share. During the first nine months of 2017, we used $239 million to pay cash dividends to shareholders.
PROPERTY CASUALTY INSURANCE LOSS AND LOSS EXPENSE RESERVES
For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines segment, the following table details gross reserves among case, IBNR (incurred but not reported) and loss expense reserves, net of salvage and subrogation reserves. Reserving practices are discussed in our 2016 Annual Report on Form 10-K, Item 7, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves, Page 93.
Total gross reserves at September 30, 2017, increased $265 million compared with December 31, 2016. Case loss reserves for losses increased $139 million, IBNR loss reserves increased by $75 million and loss expense reserves
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
61
increased by $51 million. Accounting for most of the total gross increase was the aggregate of our commercial casualty and commercial auto lines of business and our Cincinnati Re reinsurance assumed operation.
Property Casualty Gross Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Loss reserves
|
|
Loss expense reserves
|
|
Total gross reserves
|
|
|
|
|
|
Case reserves
|
|
IBNR reserves
|
|
|
|
Percent of total
|
|
At September 30, 2017
|
|
|
|
|
|
|
Commercial lines insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial casualty
|
|
$
|
956
|
|
|
$
|
586
|
|
|
$
|
588
|
|
|
$
|
2,130
|
|
|
40.3
|
%
|
|
Commercial property
|
|
270
|
|
|
10
|
|
|
61
|
|
|
341
|
|
|
6.4
|
|
|
Commercial auto
|
|
398
|
|
|
122
|
|
|
120
|
|
|
640
|
|
|
12.1
|
|
|
Workers' compensation
|
|
399
|
|
|
526
|
|
|
95
|
|
|
1,020
|
|
|
19.2
|
|
|
Other commercial
|
|
116
|
|
|
15
|
|
|
61
|
|
|
192
|
|
|
3.6
|
|
|
Subtotal
|
|
2,139
|
|
|
1,259
|
|
|
925
|
|
|
4,323
|
|
|
81.6
|
|
|
Personal lines insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal auto
|
|
237
|
|
|
43
|
|
|
68
|
|
|
348
|
|
|
6.6
|
|
|
Homeowner
|
|
112
|
|
|
(4
|
)
|
|
31
|
|
|
139
|
|
|
2.6
|
|
|
Other personal
|
|
60
|
|
|
42
|
|
|
5
|
|
|
107
|
|
|
2.0
|
|
|
Subtotal
|
|
409
|
|
|
81
|
|
|
104
|
|
|
594
|
|
|
11.2
|
|
|
Excess and surplus lines
|
|
106
|
|
|
82
|
|
|
69
|
|
|
257
|
|
|
4.8
|
|
|
Cincinnati Re
|
|
16
|
|
|
108
|
|
|
2
|
|
|
126
|
|
|
2.4
|
|
|
Total
|
|
$
|
2,670
|
|
|
$
|
1,530
|
|
|
$
|
1,100
|
|
|
$
|
5,300
|
|
|
100.0
|
%
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial casualty
|
|
$
|
928
|
|
|
$
|
553
|
|
|
$
|
556
|
|
|
$
|
2,037
|
|
|
40.5
|
%
|
|
Commercial property
|
|
253
|
|
|
28
|
|
|
58
|
|
|
339
|
|
|
6.7
|
|
|
Commercial auto
|
|
374
|
|
|
86
|
|
|
103
|
|
|
563
|
|
|
11.2
|
|
|
Workers' compensation
|
|
382
|
|
|
553
|
|
|
95
|
|
|
1,030
|
|
|
20.4
|
|
|
Other commercial
|
|
116
|
|
|
19
|
|
|
75
|
|
|
210
|
|
|
4.2
|
|
|
Subtotal
|
|
2,053
|
|
|
1,239
|
|
|
887
|
|
|
4,179
|
|
|
83.0
|
|
|
Personal lines insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal auto
|
|
228
|
|
|
24
|
|
|
66
|
|
|
318
|
|
|
6.3
|
|
|
Homeowner
|
|
102
|
|
|
22
|
|
|
29
|
|
|
153
|
|
|
3.0
|
|
|
Other personal
|
|
46
|
|
|
47
|
|
|
5
|
|
|
98
|
|
|
2.0
|
|
|
Subtotal
|
|
376
|
|
|
93
|
|
|
100
|
|
|
569
|
|
|
11.3
|
|
|
Excess and surplus lines
|
|
94
|
|
|
86
|
|
|
61
|
|
|
241
|
|
|
4.8
|
|
|
Cincinnati Re
|
|
8
|
|
|
37
|
|
|
1
|
|
|
46
|
|
|
0.9
|
|
|
Total
|
|
$
|
2,531
|
|
|
$
|
1,455
|
|
|
$
|
1,049
|
|
|
$
|
5,035
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
LIFE POLICY AND INVESTMENT CONTRACT RESERVES
Gross life policy and investment contract reserves were $2.716 billion at September 30, 2017, compared with $2.671 billion at year-end 2016, reflecting continued growth in life insurance policies in force. We discuss our life insurance reserving practices in our 2016 Annual Report on Form 10-K, Item 7, Life Insurance Policyholder Obligations and Reserves, Page 100.
Cincinnati Financial Corporation Third-Quarter 2017 10-Q
Page
62
OTHER MATTERS
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are discussed in our 2016 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 122, and updated in this quarterly report Item 1, Note 1, Accounting Policies.
In conjunction with those discussions, in the Management’s Discussion and Analysis in the 2016 Annual Report on Form 10-K, management reviewed the estimates and assumptions used to develop reported amounts related to the most significant policies. Management discussed the development and selection of those accounting estimates with the audit committee of the board of directors.
