Cincinnati Financial Corporation owns our headquarters building located on 102 acres of land in Fairfield, Ohio. This building has 1,508,200 square feet of total space. The property, including land is recorded in our financial statements at $133 million at December 31, 2020, and is classified as land, building and equipment, net, for company use. John J. & Thomas R. Schiff & Co. Inc., a related party, occupies 8,034 square feet (less than 1%). This property is used for the operations described in the Consolidated Financial Statements and accompanying Notes.
The Cincinnati Insurance Company owns the CFC Winton Center used for multiple operations with approximately 48,000 square feet of total space, located approximately six miles from our headquarters. The property, including land, is recorded in our financial statements at $8 million at December 31, 2020, and is classified as land, building and equipment, net, for company use.
We begin with an executive summary of our results of operations, followed by other highlights, an overview of our strategy, an outlook for future performance and details about critical accounting estimates. In several instances, we refer to estimated industry data so that we can provide information on our performance within the context of the overall insurance industry. Unless otherwise noted, the industry data is prepared by A.M. Best, a leading insurance industry statistical, analytical and financial strength rating organization. Information from A.M. Best is presented on a statutory accounting basis for insurance company regulation in the United States of America. When we provide our results on a comparable statutory accounting basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).
Through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on net written premium volume for the first nine months of 2020, among approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies in 45 states as discussed in Item 1, Our Business and Our Strategy.
To measure our progress, we have defined a measure of value creation that we believe captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. We refer to this measure as our value creation ratio (VCR) and it is made up of two primary components: (1) our rate of growth in book value per share plus (2) the ratio of dividends declared per share to beginning book value per share. This measure, intended to be all-inclusive regarding changes in book value per share, uses originally reported book value per share in cases where book value per share has been adjusted, such as after the adoption of Accounting Standards Updates with a cumulative effect of a change in accounting.
The 2020 value creation ratio decreased by 15.8 percentage points, compared with 2019, primarily due to a less favorable valuation for our investment portfolio, as shown in the table above. The increase in 2019, compared with 2018, was primarily due to a higher valuation for our investment portfolio. Operating results in 2019 contributed to VCR more than in 2018, despite a 0.7% contribution from certain non-recurring items in the 2018 ratio, including the impact of various tax accounting method changes.
We believe our value creation ratio is a useful measure. The table below shows calculations for VCR.
•Premium growth - We believe over any five-year period our agency relationships and initiatives can lead to a property casualty written premium growth rate that exceeds the industry average. The compound annual growth rate of our net written premiums was 6.1% over the five-year period 2016 through 2020, exceeding the 4.6% estimated growth rate for the property casualty insurance industry. The industry’s growth rate excludes its mortgage and financial guaranty lines of business.
•Combined ratio - We believe our underwriting philosophy and initiatives can drive performance to achieve our underwriting profitability target of a GAAP combined ratio over any five-year period that consistently averages within the range of 95% to 100%. Our GAAP combined ratio averaged 96.1% over the five-year period 2016 through 2020, near the more favorable end of the performance target range. Performance as measured by the combined ratio is discussed in Consolidated Property Casualty Insurance Results. Our statutory combined ratio averaged 95.6% over the five-year period 2016 through 2020, compared with an estimated 100.6% for the property casualty industry. The industry’s ratio again excludes its mortgage and financial guaranty lines of business.
•Investment contribution - We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year total return of the S&P 500 Index.
◦Investment income growth, on a pretax basis, had a compound annual growth rate of 3.2% over the five-year period 2016 through 2020.
◦Over the five years ended December 31, 2020, our equity portfolio compound annual total return was 15.9% compared with a compound annual total return of 15.2% for the Index. Our equity portfolio favors larger-capitalization, high-quality, dividend-growing stocks with a slight value orientation. For the year 2020, our equity portfolio total return was 14.7%, compared with 18.4% for the Index.
Net income decreased by $781 million or 39% in 2020, compared with 2019, including a $620 million decrease for 2020 net investment gains after taxes. The decrease in 2020 net income also included a decrease in property casualty underwriting income of $175 million after taxes, as discussed below, and was partially offset by a $21 million increase in investment income after taxes. Our investment operation’s performance is discussed further in Investments Results. Net income in 2018 included a $56 million benefit from certain other non-recurring items, primarily the impact of various tax accounting method changes as disclosed in Item 8, Note 11 of the Consolidated Financial Statements.
As the pandemic unfolded, management met with the board of directors frequently to discuss matters such as our response to prioritize the health and safety of our associates, agents and policyholders. Discussion also included near-term and longer-term financial effects. As stay-at-home orders were enacted, we promptly and effectively transitioned most of our headquarters associates to working from home. We provided the technology necessary to keep the business running, as associates continued writing and collecting insurance premiums, responding to claims and performing other operational functions. They joined our field associates who already worked from home, providing agents and policyholders with outstanding service. At the end of 2020, nearly all of our associates continued to work from home.
The COVID-19 pandemic slowed the growth of our premium revenues for 2020, including new business written premiums. Premium growth by segment is discussed below in Financial Results. For future periods, renewal premium or new business premium amounts could further decline if the basis for policy premiums, such as sales and payrolls of businesses we insure, decrease as a result of the pandemic and a weakened economy. In addition, the ultimate effects of past or future government-ordered actions, including moratoriums or deferral of premium payments related to our insurance policies, are uncertain and may further adversely affect premium growth.
Property casualty net written premiums grew 6% and earned premiums grew 7% in 2020, reflecting average renewal price increases and premium growth initiatives. The 2020 growth rate for net written premiums slowed and was 4 percentage points less than in 2019, reflecting the COVID-19 pandemic and related economic effects. Included in the 2019 growth rate was a contribution of 3 percentage points from Cincinnati Global. Trends and related factors are discussed in Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance Results, respectively.
We completed our transaction to acquire Cincinnati Global, a London-based global specialty underwriter for Lloyd's Syndicate 318, on February 28, 2019. We expect the transaction to contribute to future earnings and book value growth as we believe it should provide opportunities to support business produced by our independent agencies in new geographies and lines of business.
We measure property casualty underwriting profitability primarily by the combined ratio. Our combined ratio measures the percentage of each earned premium dollar spent on claims plus all expenses related to our property casualty operations, all on a pretax basis. A lower ratio indicates more favorable results and better underlying performance. A ratio below 100% represents an underwriting profit. Initiatives to improve our combined ratio are discussed in Item 1, Our Business and Our Strategy, Strategic Initiatives. In 2020, 2019 and 2018, favorable development on reserves for claims that occurred in prior accident years helped offset other incurred losses and loss expenses. Reserve development is discussed further in Property Casualty Loss and Loss Expense Obligations and Reserves. Losses from weather-related catastrophes are another important item influencing the combined ratio and are discussed along with other factors in Financial Results for our property casualty business and related segments.
Our life insurance segment reported profit of $11 million in 2020 and $1 million in 2019. We discuss results for the segment in Life Insurance Results. Most of this segment’s investment income is included in our investments segment results. In addition to investment income, investment gains from the life insurance investment portfolio are also included in our investments segment results.
•Manage insurance profitability - Implementation of these initiatives is intended to enhance underwriting expertise and knowledge, thereby increasing our ability to manage our business while also gaining efficiency. Better profit margins can arise from additional information and more focused action on underperforming product lines, plus pricing capabilities we are expanding through the use of technology and analytics. In addition to enhancing company efficiency, improving internal processes also supports the ability of the independent agencies that represent us to grow profitably by allowing them to serve clients faster and to more efficiently manage agency expenses.
•We expect the insurance marketplace to remain competitive, which is likely to cause carriers to pursue strategies that they believe could lead to economies of scale, market share gains or the potential for an improved competitive posture.
•A return of soft insurance market pricing could significantly affect growth rates and earned premium levels for some time into the future. If the economy falters, we may experience low or no premium growth for our property casualty segments. Premium growth also may lag as some of our growth initiatives require more time to reach their full contribution. In addition, economic factors, including inflation, may increase our claims and settlement expenses related to medical care, litigation and construction.
We discuss in Item 1A, Risk Factors, many potential risks to our business and our ability to achieve our qualitative and quantitative objectives. These are real risks, but their probability of occurring may not be high. We also believe that our risk management programs generally could mitigate some of their potential effects, in the event they would occur.
•For all other claims and events, including reinsurance assumed or ceded, IBNR reserves are calculated as the difference between an actuarial estimate of the ultimate cost of total loss and loss expenses incurred reduced by the sum of total loss and loss expense payments and total case reserves estimated for individual claims. Reserve amounts for those other claims and events are significant, and represent the majority of amounts shown as IBNR reserves and loss expense reserves in the table included in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves. We discuss below the development of actuarially based estimates of the ultimate cost of total loss and loss expenses incurred.
Our actuarial staff bases its IBNR reserve estimates for these losses primarily on the indications of methods and models that analyze accident year data. Accident year is the year in which an insured claim, loss or loss expense occurred. The specific methods and models that our actuaries have used for the past several years are:
•Emergence of loss and defense and cost containment expenses, also referred to as DCCE, on an accident year basis. Historical paid loss, reported loss and paid DCCE data for the business lines we analyze contain patterns that reflect how unpaid losses, unreported losses and unpaid DCCE as of a financial statement date will emerge in the future. Unless our actuarial staff or management identifies reasons or factors that invalidate the extension of historical patterns into the future, these patterns can be used to make projections necessary for estimating IBNR reserves. Our actuaries significantly rely on this assumption in the application of all methods and models mentioned above.
•Calendar year inflation. For long-tail and mid-tail business lines, calendar year inflation trends for future paid losses and paid DCCE do not vary significantly from a stable, long-term average. Our actuaries base reserve estimates derived from probabilistic trend family models on this assumption.
Substantially all of the $21.194 billion of securities in our investment portfolio at year-end 2020, measured at fair value, are classified as Level 1 or Level 2. Financial assets that fall within Level 1 and Level 2 are priced according to observable data from identical or similar securities that have traded in the marketplace. Also within Level 2 are securities that are valued by outside services or brokers where we have evaluated and verified the pricing methodology and determined that the inputs are observable.
We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. In addition, Other includes the financial results of our reinsurance assumed operations, known as Cincinnati Re, and our London-based global specialty underwriter known as Cincinnati Global.
Earned and net written premiums for our consolidated property casualty operations grew in 2020, reflecting average renewal price increases and strategic initiatives for targeted growth. A key measure of property casualty profitability is underwriting profit or loss. Our 2020 underwriting profit of $119 million was $222 million less than in 2019, including a $370 million unfavorable effect from a higher amount of catastrophe losses, mostly caused by severe weather, and $85 million of pandemic-related incurred losses and expenses. Pandemic-related amounts were discussed in more detail in Corporate Financial Highlights of Management’s Discussion and Analysis. Prior accident year loss experience before catastrophes during 2020 was less favorable than in 2019, and represented $121 million of the underwriting profit decrease from 2019. The various less favorable effects in 2020 offset improved profitability from factors such as higher pricing and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices. Underwriting profit trends are discussed further below.
The COVID-19 pandemic and related economic effects slowed the rate of our premium growth in 2020. Consolidated property casualty net written premiums grew 6% in the second quarter, 3% in the third quarter and 7% in the fourth quarter, following growth of 10% for both the first quarter of 2020 and full-year 2019. In addition to reduced insured exposure levels that affected some lines of business, commercial lines new business written premiums for the last three quarters of 2020 decreased compared with the same periods a year ago, and contributed to the slowed growth in net written premiums.
Loss experience for our insurance operations is influenced by many factors as discussed in further detail in Financial Results by property casualty insurance segment. Consolidated property casualty paid losses before catastrophe effects for 2020 decreased by 12% compared with 2019. We believe some of the decrease in those paid losses is due to slower business activity during the pandemic for some businesses we insure, or other pandemic-related factors such as less miles driven for insured vehicles. The commercial lines insurance segment decreased by 12% and the personal lines insurance segment decreased by 18%. As a ratio to earned premiums, consolidated property casualty 2020 paid losses before catastrophe effects were 7.8 percentage points lower than the same period a year ago, but were largely offset by the change in loss reserves that increased by 5.4 points. For future periods, factors that reduce exposure to certain insurance losses, such as fewer vehicular miles driven or reduced sales and payrolls for businesses, could cause a reduction in future losses that generally correspond to reduced premiums. However, there could be losses or legal expenses that occur independent of changes in mileage, sales or payrolls of businesses we insure.
New business written premiums produced through agencies increased $21 million in 2020, compared with 2019. Agents appointed during 2020 or 2019 produced a 2020 increase in standard lines new business of $52 million. Growth initiatives also favorably affect growth in subsequent years, particularly as newer agency relationships mature over time.
•Combined ratio - The combined ratio increased by 4.3 percentage points in 2020, compared with 2019, including a 6.1 percentage-point increase in the ratio for catastrophe losses and a 1.5 point increase from pandemic-related incurred losses and expenses. The 2020 ratio for current accident year losses and loss expenses before catastrophes improved by 3.9 percentage points, reflecting lower paid losses discussed above, a decrease in commercial lines large losses for new losses above $1 million described below, and what we believe are improvements to some of our loss experience due to recent-year initiatives to improve pricing precision and claims and loss control practices. The remainder of the 2020 combined ratio increase included 2.4 percentage
points less benefit in the ratio for prior accident year losses and loss expenses before catastrophes. We further discuss ratios related to reserve development in the sections that follow the Catastrophe Losses Incurred table below.
Our statutory combined ratio was 96.7% in 2020 compared with 93.4% in 2019 and 96.0% in 2018. The estimated statutory combined ratio for the property casualty industry, with the industry’s ratio excluding its mortgage and financial guaranty lines of business, was 99.3% in 2020, 99.2% in 2019 and 99.6% in 2018. The contribution of catastrophe losses to our statutory combined ratio was 11.2 percentage points in 2020, 6.0 percentage points in 2019 and 7.1 percentage points in 2018, compared with industry estimates of 7.5, 4.1 and 5.7 percentage points, respectively. Components of the combined ratio are discussed below.
Catastrophe loss trends are an important factor in assessing trends for overall underwriting results. Our 10-year historical annual average contribution of catastrophe losses to the combined ratio was 7.6 percentage points at December 31, 2020. Our five-year average was 8.1 percentage points.
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. For all property casualty lines of business in aggregate, net loss and loss expense reserves at December 31, 2020, were $654 million higher than at year-end 2019, including $533 million for incurred but not reported (IBNR) reserves. The $654 million reserve increase raised year-end 2019 net loss and loss expense reserves by 11%, compared with a 7% increase in 2020 earned premiums.
The 57.0% ratio for current accident year loss and loss expenses before catastrophe losses for 2020 decreased 3.9 percentage points compared with the 60.9% accident year 2019 ratio measured as of December 31, 2019. Contributors to the decrease included a 0.6 percentage-point reduction in the ratio for current accident year losses of $1 million or more per claim, shown in the table below, and lower paid losses discussed above.
In 2020, total large losses incurred decreased by $26 million, or 8%, net of reinsurance, primarily due to a decrease for our commercial lines insurance segment. The corresponding ratio decreased 0.8 percentage points. The large loss data included in the table above does not include Cincinnati Re and Cincinnati Global. Our analysis of large losses incurred indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.
Loss experience for our insurance operations is influenced by many factors, and higher catastrophe losses were the main driver of the 2020 increase in losses and loss expenses, compared with 2019. Pandemic-related amounts totaled approximately $36 million and were discussed in more detail in Corporate Financial Highlights of Management’s Discussion and Analysis. For 2020, loss experience before catastrophe effects for our commercial lines insurance segment continued to improve. The main contributor of the improvement was the ratio for accident year 2020 loss and loss expenses before catastrophe losses. The improvement was driven by our commercial casualty and commercial auto lines of business, while commercial property increased by 1.1 points and workers' compensation increased by 0.9 points. The unfavorable change for commercial property included 3.0 points for $30 million of legal expenses for defense of business interruption claims, related to the pandemic, incurred during 2020. The unfavorable change for workers' compensation reflected average percentage price changes that have decreased in the mid-single-digit range in several recent quarters.
For future periods, factors that reduce exposure to certain insurance losses, such as fewer vehicular miles driven or reduced sales and payrolls for businesses, could cause a reduction in future losses that generally correspond to reduced premiums. However, there could be losses or legal expenses that occur independent of changes in mileage, sales or payrolls of businesses we insure.
Our commercial lines statutory combined ratio was 97.5% in 2020, compared with 92.3% in 2019 and 95.1% in 2018. The contribution of catastrophe losses to our commercial lines statutory combined ratio was 10.4 percentage points in 2020, 4.5 percentage points in 2019 and 5.8 percentage points in 2018.
Our 4% increase in 2020 agency renewal written premiums included higher average pricing. We measure average changes in commercial lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies. In 2020, our standard commercial lines policies averaged an estimated pricing change at a percentage in the mid-single-digit range, compared with a low-single-digit range in 2019. Our average commercial lines pricing change includes the flat pricing effect of certain coverages within package policies written for a three-year term that were in force but did not expire during the period being measured. Therefore, the average commercial lines pricing change we report reflects a blend of policies that did not expire and other policies that did expire during the measurement period.
Changes in the economy can affect insured exposures that directly relate to premium amounts charged for some policies. For commercial accounts, we usually calculate initial estimates for general liability premiums based on estimated sales or payroll volume, while we calculate workers’ compensation premiums based on estimated payroll volume. A change in sales or payroll volume generally indicates a change in demand for a business’s goods or services, as well as a change in its exposure to risk. Policyholders who experience sales or payroll volume changes due to economic factors may also have other exposures requiring insurance, such as commercial auto or commercial property. Premium levels for these other types of coverages generally are not linked directly to sales or payroll volumes.
In 2020, our commercial lines new business premiums written by our agencies increased $5 million, or 1%, compared with 2019. The rate of growth in 2020 was much slower than in 2019, reflecting increased competition that resulted in fewer opportunities to write policies at pricing levels we believed were adequate. New business premium volume in recent years has been significantly influenced by new agency appointments. Agencies appointed since the beginning of 2019 produced commercial lines new business written premiums of $55 million, in aggregate, during 2020, up $39 million from what they produced during 2019. All other agencies contributed the remaining $460 million, down $34 million from the $494 million they produced in 2019.
The 59.2% ratio for current accident year loss and loss expenses before catastrophe losses for 2020 decreased 2.5 percentage points compared with the 61.7% accident year 2019 ratio measured as of December 31, 2019. Contributors to the decrease included less large losses incurred, described below, and the corresponding ratios for new losses above $1 million, with a 1.0 percentage-point decrease to the 2020 ratio, and lower paid losses discussed in Consolidated Property Casualty Insurance Results. Other contributions included favorable effects from various initiatives, such as those to improve pricing precision and loss experience related to claims and loss control practices.
In 2020, total large losses incurred decreased by $40 million, or 15%, net of reinsurance. The corresponding ratio decreased 1.5 percentage points. The 2020 decreases on both a dollar and ratio basis were largely due to lower amounts for our commercial casualty and commercial property lines of business. In 2019, total large losses incurred and the corresponding ratio were lower than in 2018, largely due to lower amounts of large losses for our commercial casualty line of business. Our analysis indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.
Commercial lines commission expenses as a percent of earned premiums decreased in 2020, compared with 2019, primarily due to a decrease in the ratio for profit-sharing commissions for agencies that reflected a higher amount of catastrophe losses. The ratio for 2019 increased compared with 2018, reflecting an increase in the ratio for agency profit-sharing commissions. In 2020, other underwriting expenses as a percent of earned premiums decreased, compared with 2019, primarily due to a lower level of business travel spending for associates and earned premiums that rose at a slightly faster pace than other underwriting expenses, in addition to ongoing expense management. In 2019, the ratio matched 2018.
The COVID-19 pandemic did not have a significant effect on our personal lines insurance segment premiums in 2020. Net written premiums grew 5% in 2020, following growth of 4% in 2019. Early in the second quarter of 2020, we announced a 15% policyholder credit applied to each personal auto policy for the months of April and May, resulting in approximately $16 million of second-quarter 2020 underwriting expense.
•Combined ratio - The 2020 combined ratio improved by 2.7 percentage points, compared with 2019, despite a 5.5 percentage-point increase in the ratio for 2020 natural catastrophe losses. Development on prior accident
years’ loss and loss expense reserves before catastrophes during 2020 was 1.4 percentage points less favorable than in 2019.
Our personal lines statutory combined ratio was 96.4% in 2020, compared with 99.3% in 2019 and 101.2% in 2018. The contribution of catastrophe losses to our personal lines statutory combined ratio was 15.4 percentage points in 2020, 9.9 percentage points in 2019 and 9.4 percentage points in 2018.
Other written premiums primarily consist of premiums that are ceded to reinsurers and lower our net written premiums. A decrease in ceded premiums favorably impacted net written premium growth by $3 million in 2020.
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain much of the movement in the current accident year loss and loss expense ratio for accident year 2020, compared with accident year 2019. Catastrophe losses added 16.0 percentage points in 2020, 9.7 points in 2019 and 9.1 points in 2018 to the respective personal lines current accident year loss and loss expense ratios in the table above. Personal lines catastrophe losses for 2020 resulted in a ratio higher than our 10.4% 10-year annual average for personal lines that included 22.8% for 2011. Personal lines catastrophe losses are inherently volatile, as discussed above and in Consolidated Property Casualty Insurance Results.
The 52.1% ratio for current accident year loss and loss expenses before catastrophe losses for 2020 improved 10.3 percentage points compared with the 62.4% accident year 2019 ratio measured as of December 31, 2019. Some of the improvement was due to lower paid losses discussed in Consolidated Property Casualty Insurance Results. The improvement was partially offset by a 0.4 percentage-point increase in the ratio for current accident year losses of $1 million or more per claim, shown in the table below. Other contributions included favorable effects from various initiatives, such as those to improve pricing precision and loss experience related to claims and loss control practices.
Personal lines loss and loss expense reserve development on prior accident years recognized in 2020 was favorable by $18 million, in aggregate, compared with $27 million in 2019. The 2020 net favorable reserve development included $15 million for our personal auto line of business and $5 million for our homeowner line of business. The 2019 net favorable reserve development included $26 million for our personal auto line of business, primarily for accident year 2018. In 2018, our homeowner line of business prior accident year net reserve development was unfavorable by $24 million and was partially offset by favorable reserve development for personal auto. Development by accident year and other trends for personal lines loss and loss expenses and the related ratios are further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.
In 2020, personal lines total large losses incurred increased by $15 million, or 30%, net of reinsurance. The ratio for 2020 large losses as a percent of earned premiums increased 0.9 percentage points. The 2020 increases on both a dollar and ratio basis were primarily due to higher amounts for our homeowner line of business and umbrella coverage in our other personal line of business. In 2019, total large losses increased, compared with 2018, primarily due to higher amounts for our homeowner line of business. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.
•Premiums - Earned premiums and net written premiums continued to grow during 2020, including higher renewal written premiums that included average renewal estimated price increases in the mid-single-digit range. New business written premiums in 2020 matched 2019 and reflected a highly competitive market, particularly for larger policies.
portion that increased by 7.8 points and a case incurred portion that increased by 1.5 points. The paid component of the case incurred portion increased by 1.1 percentage points.
The $45 million increase in 2020 renewal premiums reflected the opportunity to renew many policies for the first time as well as higher renewal pricing. Average renewal estimated price increases were in the mid-single-digit range during 2020. We measure average changes in excess and surplus lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies.
New business written premiums in 2020 matched 2019, as a highly competitive market offset rising premium rates and our additional marketing efforts. The high rate of growth in 2019 was largely due to more opportunities in the marketplace to write policies with annual premiums of $10,000 or more. In 2020, our underwriters saw fewer opportunities to write larger policies at pricing levels that we believed were adequate. Other written premiums in 2020 matched 2019, and are primarily premiums that are ceded to reinsurers and therefore reduce our net written premiums.
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses, as well as the associated loss expenses. The majority of the total incurred losses and loss expenses shown above in the three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than 20% of our excess and surplus lines current accident year incurred losses and loss expenses represents net paid amounts, a large majority represents reserves for our estimate of unpaid losses and loss expenses. These reserves develop over time, and we update our estimates of previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 55.0% accident year 2019 loss and loss expense ratio reported as of December 31, 2019, developed favorably by 0.7 percentage points to 54.3% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2020. Accident year 2018 for this segment developed favorably during 2019 but during 2020 developed unfavorably, as indicated by the progression over time of the ratios in the table.
Excess and surplus lines reserve development on prior accident years was a net unfavorable $7 million in 2020, compared with a favorable net amount of $11 million in 2019. The net amount for 2020 included $2 million of favorable development in aggregate for accident years 2017 through 2019, while the aggregate amount for accident years prior to 2017 was an unfavorable $9 million. The unfavorable reserve development reflected more prudent reserving, as claims on average are remaining open longer than previously expected.
We believe the loss and loss expense reserves for our excess and surplus lines business are adequate. The amount of outstanding reserves for our excess and surplus lines operation can be seen in a table in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves. One indication of how long it takes for most of the outstanding reserves to be settled is to measure outstanding reserves by accident year at different points in time, using Item 8, Note 4 of the Consolidated Financial Statements. For example, for accident years 2013, 2012 and 2011, in aggregate, after subtracting cumulative paid amounts from incurred amounts at December 31, 2013, reserves for estimated unpaid losses, plus the portion of loss expenses known as ALAE, equaled $129 million. For those same accident years, at December 31, 2020, the reserve estimate for the remaining unpaid amount equaled $4 million. The inherent uncertainty in estimating reserves is discussed in Liquidity and Capital Resources, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves. Development trends by accident year are further discussed in Property Casualty Insurance Development of Estimated Reserves by Accident Year.
The excess and surplus lines market is expected to see the magnitude of rate increases rise slightly for risks that are casualty-driven. For property risks involving catastrophe exposures, premium rates in the foreseeable future are expected to be firm. New business opportunities, including those on larger accounts, are expected to increase as standard market insurance companies continue to re-underwrite business they previously took from the excess and surplus lines market and as larger excess and surplus lines companies re-underwrite their business with an emphasis on underwriting profitability. Firming is expected to continue for specific classes of business where loss costs are exceeding rates, such as habitational for property and general liability coverages, liquor liability for general liability coverages and hired and non-owned for general liability coverages.
•Revenues - Earned premiums rose 7% for the year 2020, as shown in the table below that includes details by major line of business. Our largest life insurance product line, term life insurance, rose 6%. Net in-force policy face amounts rose 5% to $73.475 billion at year-end 2020 from $69.984 billion at year-end 2019 and $66.142 billion at year-end 2018.
Life insurance segment profitability depends largely on premium levels, the adequacy of product pricing, underwriting skill and operating efficiencies. This segment’s results include only investment interest credited to contract holders (interest assumed in life insurance policy reserve calculations). The remaining investment income is reported in the investments segment results. The life investment portfolio is managed to earn target spreads between earned investment rates on general account assets and rates credited to policyholders. We consider the value of assets under management and investment income for the life investment portfolio as key performance indicators for the life insurance segment. We seek to maintain a competitive advantage with respect to benefits paid and reserve increases by consistently achieving better than average claims experience due to skilled underwriting.
We recognize that assets under management, capital appreciation and investment income are integral to evaluation of the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and investment gains or losses from life insurance-related invested assets, our life insurance subsidiary reported net income of $32 million in 2020, compared with $39 million in 2019 and $48 million in 2018. The life insurance subsidiary portfolio had after-tax net investment losses of $21 million in 2020, $4 million in 2019 and $4 million in 2018. Investment gains and losses are discussed under Investments Results. We exclude most of our life insurance company investment income from investments segment results.
During 2020, the COVID-19 pandemic and related economic effects caused volatility in fair values of securities discussed below in Total Investment Gains and Losses. Our fixed-maturity and equity portfolios experienced a decrease in valuation during the first quarter of 2020, in large part due to the volatility and economic uncertainty caused by the coronavirus outbreak that affected various sectors of our portfolio. During the first quarter of 2020, already low oil prices and the sudden demand drop in related products due to governmental actions, such as shelter-in-place orders, contributed to the energy sector accounting for most of the write-downs of impaired securities in the tables below. During the last three quarters of 2020, valuations increased for a significant portion of our fixed-maturity and equity portfolios.
The table below shows total return based on assumptions that simplify cash flow timing that is commonly used in total return measures. This simplified calculation uses data shown in our consolidated financial statements or notes to those statements. Added to invested asset amounts from our consolidated balance sheets are 50% of annual amounts pertaining to invested asset categories included in net cash used in investing activities from our consolidated statements of cash flows. The cash flow amounts are reduced by net gains from investment portfolio securities sales or called bonds, with the net result reduced by 50% to represent estimated new cash invested during each respective year. All new cash is assumed to be invested at the midpoint of the year.
The primary drivers of investment income are highlighted below, followed by additional details of our investment results.
In 2020, we continued to invest available cash flow in both fixed income and equity securities in a manner that we believe balances current income needs with longer-term invested asset growth goals. While our bond portfolio more than covers our insurance reserve liabilities, we believe our diversified common stock portfolio of mainly blue chip, dividend-paying companies represents one of our best investment opportunities for the long term. We position our portfolio with consideration to both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield.
The table below summarizes pretax yield to amortized costs excluding any book value adjustments due to impairment for bonds in our fixed-maturity portfolio by various maturity periods.
The average pretax yield of 3.97% for fixed-maturity securities acquired during 2020, shown in the table below, was lower than the 4.12% average yield-to-amortized cost of the fixed-maturity securities portfolio at the end of 2020.
Investment gains and losses are recognized on the sales of investments, for certain changes in fair values of securities even though we continue to hold the securities or as otherwise required by GAAP. New accounting requirements adopted in 2018 resulted in reporting, through net income, the change in fair value for equity securities still held, as disclosed in Note 1, Summary of Significant Accounting Policies. Total investment gains and losses included $841 million of gains in 2020, from the recognition of fair value changes of equity securities still held that prior to 2018 would have been reported in other comprehensive income (OCI) instead of net income. Change in unrealized gains or losses for fixed-maturity securities are included as a component of OCI. Accounting requirements for the allowance for credit losses and other-than-temporary impairment (OTTI) charges for the fixed-maturity portfolio are disclosed in Item 8, Note 1, Summary of Significant Accounting Policies. The factors we consider when evaluating impairments are also discussed in Critical Accounting Estimates, Asset Impairment.
As appropriate, we buy, hold or sell both fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We generally purchase fixed-maturity securities with the intention to hold until maturity. If they no longer meet our investment criteria, they are divested. Sales of fixed-maturity securities are usually due to a change in credit fundamentals. Pretax total investment gains in 2020 and 2019 were largely due to favorable changes in fair values of equity securities even though we continue to hold the securities. In 2018, total investment losses reflected unfavorable changes in fair values of fixed-maturity and equity securities we continued to hold. Additional information about investment gains or losses is included in Item 8, Note 2 of the Consolidated Financial Statements.
Write-downs of impaired securities or OTTI charges from the investment portfolio by the asset classes we described in Item 1, Our Segments, Investments Segment, are summarized below:
After a rapid and significant drop in securities prices during the early phase of the pandemic, both the bond and equity markets rallied through the remainder of 2020. Historically tight corporate credit spreads, along with a likely continuation of accommodating interest rate policies, will challenge new money rates and investment income growth in the near term.
An interruption or reversal of the market recovery that occurred during the second half of 2020 could have detrimental effects on securities prices and potentially lead to increases in the allowance for credit losses or write-downs of impaired securities to fair value. Our asset impairment committee continues to monitor the investment portfolio. Our asset impairment policy is described in Critical Accounting Estimates, Asset Impairment.
Total revenues in 2020 and 2019 for our Other operations increased, compared with the respective prior-year periods, primarily due to earned premiums of Cincinnati Re and Cincinnati Global. Other also includes noninvestment operations of the parent company and its commercial leasing and financial services subsidiary, CFC Investment Company. Total expenses for Other also increased in 2020 and 2019, primarily due to losses and loss expenses and underwriting expenses from Cincinnati Re and Cincinnati Global.
The changes in our effective tax rate between periods were due to changes in our net investment gains and losses, changes in our underwriting income, as well as changes in investment income. As a result of adoption of ASU 2016-01, effective January 1, 2018, changes in our effective tax rate were impacted by large net investment losses, due to the recognition of fair value changes of equity securities still held, included in 2018 income and large investment gains included in both 2019 and 2020 income. In addition, our change in the 2018 effective tax rate included a reduction by 19.9% as a result of Internal Revenue Service approved changes to our tax accounting methods, primarily related to the valuation of our tax basis unpaid losses.
Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged, fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See Item 1, Our Segments, Fixed-Maturity Security Investments, for further discussion on municipal bond purchases in our fixed-maturity investment portfolio.
The COVID-19 pandemic and related economic effects slowed the rate of our premium growth in 2020. Most states where we market our products issued mandates or requests such as moratoriums on policy cancellations or nonrenewals for nonpayments of premiums, forbearance on premium collections, waivers of late payment fees and extended periods in which policyholders may make their missed payments. Extended or future moratoriums and deferral of premiums may disrupt cash flows while also increasing credit risk from policyholders struggling to make timely premium payments.
The pandemic did not have a significant effect on our cash flows during 2020. In addition to our historically positive operating cash flow to meet the needs of operations, we have the ability to sell a portion of our high-quality, liquid investment portfolio or slow investing activities if such need arises. We also have additional capacity to borrow on our revolving short-term line of credit, as described further below.
At December 31, 2020, the parent company had $3.771 billion in cash and marketable securities, providing strong liquidity to fund cash outflows, as needed. The payment of dividends to shareholders is largely based upon receiving subsidiary dividends. Alternatively, we could sell investments or use our line of credit to support the dividend payment.
The parent company’s primary sources of cash inflows are dividends from our lead insurance subsidiary, investment income and sale proceeds from investments. The parent company’s cash outflows are primarily interest and principal payments on long- and short-term debt, dividends to shareholders, common stock repurchases, deposits at Lloyd's and general operating expenses. The table below shows a summary, by the direct cash flow method, of the major sources and uses of cash flow of the parent company.
The parent company’s lead insurance subsidiary largely represents the operations of the property casualty segments. The primary sources of cash inflows are collection of premiums, investment income, maturity of fixed-income securities and sale proceeds from investments. Property casualty insurance premiums generally are received before losses are paid under the policies purchased with those premiums. Cash outflows are primarily loss and loss expenses, commissions, salaries, taxes, operating expenses and investment purchases. Over the three-year period ended December 31, 2020, premium receipts and investment income have been more than sufficient to pay claims and operating expenses. Excess cash flows were partially used to pay dividends to the parent company. We are not aware of any known trends that would materially change historical cash flow results, other than fluctuations in catastrophe claims and other large losses, either individually or in aggregate.
Cash in excess of operating requirements is invested in fixed-maturity and equity securities. Cash generated from investment income provides an important investment contribution to cash flow and liquidity. The sale of investments could provide an additional source of liquidity at either the parent company or insurance subsidiary level, if required. In addition to possible sales of investments, proceeds of call or maturities of fixed-maturity securities also can provide liquidity. During the five-year period beginning in 2021, fair value of $4.286 billion, or 34.8%, of our fixed-maturity portfolio is scheduled to mature. At December 31, 2020, we had $8.541 billion of common stock securities, with $3.686 billion, or 43.2%, held by the parent company.
We provide details of our three long-term notes in Item 8, Note 8 of the Consolidated Financial Statements. None of the notes are encumbered by rating triggers. The total principal amount of our long-term debt at December 31, 2020, was $793 million and included:
•$391 million aggregate principal amount of 6.920% senior debentures due 2028.
•$374 million aggregate principal amount of 6.125% senior debentures due 2034.
At December 31, 2020, we had a $300 million line of credit with commercial banks, with $54 million borrowed. The amount borrowed was $39 million at December 31, 2019, and during 2020 we borrowed $90 million of which $75 million was used to repurchase shares during the first quarter of 2020. The $75 million was repaid on December 31, 2020. That unsecured revolving line of credit has an accordion feature giving us the option to double the $300 million amount, under the same terms and conditions. Terms and conditions of the agreement include a debt-to-total capital maximum of 35% and the agreement has no net worth covenant. It was due to expire on February 4, 2025, with the option of a one-year extension. On December 11, 2020, we exercised the option to extend the term of the line of credit one additional year to February 4, 2026.
•Common stock repurchase - Generally, our board believes that share repurchases can help fulfill our commitment to enhancing shareholder value. Consequently, the board has authorized the repurchase of outstanding shares, giving management discretion to purchase shares at reasonable prices in light of circumstances at the time of purchase. Our approach has been to hold capital adequate to support future growth of our insurance operations and repurchase shares at management's discretion. Repurchases are intended to offset the issuance of shares
At December 31, 2020, we estimated our future contractual obligations as follows:
•Commissions - We expect commission payments to generally track with written premiums.
•Funds at Lloyd's - From time to time, we may be required to meet certain cash funding requirements on behalf of Cincinnati Global. During 2020, the parent company deposited a net $42 million with Lloyd's to meet these funding requirements.
In any year, we consider the most likely source of pressure on liquidity would be an unusually high level of catastrophe loss payments within a short period of time. There could be additional obligations for our insurance operations due to increasing severity or frequency of noncatastrophe claims. To address the risk of unusually large insurance loss obligations, including catastrophe events, we maintain property casualty reinsurance contracts with highly rated reinsurers, as discussed under 2021 Reinsurance Ceded Programs. We also monitor the financial condition of our reinsurers because their insolvency could jeopardize a portion of our $517 million reinsurance recoverable asset at December 31, 2020. Parent-company liquidity could also be constrained by Ohio regulatory requirements that restrict the dividends insurance subsidiaries can pay.
Economic weakness also has the potential to affect our liquidity and capital resources in a number of different ways, including delinquent payments from agencies, defaults on interest payments by fixed-maturity holdings in our portfolio, dividend reductions by holdings in our equity portfolio or declines in the market value of holdings in our portfolio. In an effort to support insurance consumers during this pandemic, most states where we market our products issued mandates or requests such as moratoriums on policy cancellations or nonrenewals for nonpayments of premiums, forbearance on premium collections, waivers of late payment fees and extended periods in which policyholders may make their missed payments. Such actions, if extended or enacted again, may result in delayed premium receipts, disrupting cash flows and increasing credit risk from policyholders unable to make timely premium payments. Cash flows and gross premium receipts may also be affected by mid-term adjustments to exposures on which premium calculations are based to reflect the economic impact of the COVID-19 crisis on insureds’ business operations.
Our estimate of future gross property casualty loss and loss expense payments of $6.677 billion is lower than loss and loss expense reserves of $6.746 billion reported on our balance sheet at December 31, 2020. The $69 million difference is due to certain life and health loss reserves. Reserving practices are discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves.
Our estimates of gross property casualty loss and loss expense payments do not include reinsurance receivables or ceded losses. As discussed in 2021 Reinsurance Ceded Programs, we purchase reinsurance to mitigate our property casualty risk exposure. Ceded property casualty reinsurance unpaid receivables of $277 million at year-end 2020 are an offset to our gross property casualty loss and loss expense obligations. Our reinsurance program mitigates the liquidity risk of a single large loss or an unexpected rise in claim severity or frequency due to a catastrophic event. Reinsurance does not relieve us of our obligation to pay covered claims. The financial strength of our reinsurers is important because our ability to recover losses under our reinsurance agreements depends on the financial viability of the reinsurers.
The historical pattern of using premium receipts for the payment of loss and loss expenses has enabled us to extend slightly the maturities of our investment portfolio beyond the estimated settlement date of the loss reserves. The effective duration of our consolidated property casualty fixed-maturity portfolio was 4.3 years at year-end 2020. By contrast, the duration of our loss and loss expense reserves was approximately 3.4 years. We believe this difference in duration does not affect our ability to meet current obligations because cash flow from operations is sufficient to meet these obligations. In addition, investment holdings could be sold, if necessary, to meet higher than anticipated loss and loss expenses.
The following table shows net reserve changes at year-end 2020, 2019 and 2018 by property casualty segment and accident year:
Favorable reserve development was $54 million for our commercial casualty line of business and $39 million for our workers’ compensation line of business, together accounting for approximately 71% of the overall total. Drivers of significant reserve development typically reflect loss emergence on known claims that was more favorable or less favorable than previously anticipated for various lines of business and are discussed below.
•Commercial casualty - During 2020 and 2019, we continued to experience favorable development on prior accident years in aggregate. We continue to watch this line so we can detect unfavorable trends should they reoccur.
A single large loss or an unexpected rise in claims severity or frequency due to a catastrophic event is a risk to the company's liquidity and financial strength. To control such losses, we limit marketing property casualty insurance in specific geographic areas and monitor our exposure in certain coastal regions. Examples of this include the reduction in recent years of our homeowner policies in the southeastern U.S. coastal region or limiting our earthquake writings in the New Madrid regions. Loss exposures in these areas have been identified as a major contributor to our catastrophe probable maximum loss estimates. The table below includes probable maximum loss estimates for the peril of hurricane. These estimates were subsequently reduced, in large part due to less exposure from southeastern U.S. homeowner policies. We also continually review aggregate exposures to large disasters and purchase reinsurance protection to cover these exposures. For business other than Cincinnati Re and Cincinnati Global, we use the Risk Management Solutions (RMS) and Applied Insurance Research (AIR) models to evaluate exposures to a once-in-a-100-year and a once-in-a-250-year event to help determine appropriate reinsurance coverage programs. In conjunction with these activities, we also continue to evaluate information provided by our reinsurance broker. Examples include deterministic modeling of probable maximum loss contribution from growth in new geographic territories.
To help determine appropriate reinsurance coverage for hurricane, earthquake and tornado/hail exposures, for business other than Cincinnati Re and Cincinnati Global we use the RMS and AIR models to estimate the probable maximum loss from a single event or multiple events occurring in a one-year period. The models are proprietary in nature, and the vendors that provide them periodically update the models, sometimes resulting in significant changes to their estimate of probable maximum loss. As of the end of 2020, both models indicated that a hurricane event represents our largest amount of exposure to losses. The table below summarizes estimated probabilities and the corresponding probable maximum loss from a single hurricane event occurring in a one-year period, for business other than Cincinnati Re and Cincinnati Global, and indicates the effect of such losses on consolidated shareholders’ equity at December 31, 2020. Net losses are net of reinsurance, estimated reinstatement premiums and income taxes, assuming a 21% federal tax rate, and assume our 2021 reinsurance programs apply.
•Property excess treaty - We purchased a property reinsurance treaty that provides an additional $50 million in protection for certain property losses. This treaty, along with the property per risk treaty, provides a total of $100 million of protection. The 2021 ceded premium estimate was approximately $4 million, compared with $3 million for the 2020 estimate.
•Casualty per occurrence treaty - The casualty treaty provides capacity up to $25 million. Similar to the property treaty, it provides sufficient capacity to cover the vast majority of casualty accounts we insure and also includes protection for extra-contractual liability coverage losses. We retain the first $10 million of each loss. Losses between $10 million and $25 million are reinsured at 100%. The 2021 ceded premium estimate was $13 million, compared with $12 million for the 2020 estimate.
•Casualty excess treaty - We purchase a casualty reinsurance treaty that provides an additional $45 million in protection for certain casualty losses. This treaty, along with the casualty per occurrence treaty, provides a total of $70 million of protection for workers’ compensation, extra-contractual liability coverage and clash coverage losses, which would apply when a single occurrence involves multiple policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The 2021 ceded premium estimate was approximately $3 million, essentially unchanged from the 2020 estimate.
•Effective June 1, 2020, we restructured and renewed our combined property catastrophe occurrence excess of loss treaty for a period of one year, commuting the expiring treaty one month in advance of its expiration date. The treaty provides coverage for various combinations of occurrences, has an aggregate limit of $50 million in excess of $150 million per loss and applies to business written on a direct basis and by Cincinnati Re. Cincinnati Global catastrophe losses are not applicable to the treaty. Ceded premiums for the one-year renewal period of coverage from this treaty are estimated to be approximately $11 million. Cincinnati Re purchases additional reinsurance coverages with various triggers and unique features. As of June 1, 2020, Cincinnati Re had separate property catastrophe excess of loss coverage with a total available aggregate limit of $30 million.
Reinsurance protection for the company’s surety business is covered under a separate treaty with many of the same reinsurers that write the property casualty working treaties. Reinsurance protection for Cincinnati Global's business is also provided through separate treaties.
The Cincinnati Specialty Underwriters Insurance Company has separate property and casualty reinsurance treaties for 2021 through its parent, The Cincinnati Insurance Company. Primary components of the treaties include:
•Casualty treaties - The casualty treaty is written on an excess of loss basis and provide limits up to $6 million, which is adequate capacity for the risk profile we insure. A second treaty layer of $5 million excess of $6 million is written to provide coverage for extra contractual obligations or clash exposures. The maximum retention for any one casualty loss is $2 million by Cincinnati Specialty Underwriters. Losses between $2 million and $6 million are reinsured at 100% by The Cincinnati Insurance Company.
We also have catastrophe reinsurance coverage on our life insurance operations that reimburses us for covered net losses in excess of $13 million. Our recovery is capped at $75 million for losses involving our associates.
The following table shows our five largest life reinsurance receivable amounts by reinsurer at year-end 2020 and 2019. Insurer financial strength ratings are also shown.
This is our “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in Item 1A, Risk Factors.
◦Securities market disruption or volatility and related effects such as decreased economic activity that affect the company’s investment portfolio and book value
◦An unusually high level of insurance losses, including risk of legislation or court decisions extending business interruption insurance in commercial property coverage forms to cover claims for pure economic loss related to the COVID-19 pandemic
◦Decreased premium revenue and cash flow from disruption to our distribution channel of independent agents, consumer self-isolation, travel limitations, business restrictions and decreased economic activity
◦Inability of our workforce, agencies or vendors to perform necessary business functions
•Ongoing developments concerning business interruption insurance claims and litigation related to the COVID-19 pandemic that affect our estimates of losses and loss adjustment expenses or our ability to reasonably estimate such losses, such as:
◦The continuing duration of the pandemic and governmental actions to limit the spread of the virus that may produce additional economic losses
◦The lack of submitted proofs of loss for allegedly covered claims
◦Judicial rulings in similar litigation involving other companies in the insurance industry
◦Whether and to what degree any class of policyholders may be certified
•Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes
•Increased frequency and/or severity of claims or development of claims that are unforeseen at the time of policy issuance
•Inadequate estimates, assumptions or reliance on third-party data used for critical accounting estimates
•Declines in overall stock market values negatively affecting the company’s equity portfolio and book value
•Prolonged low interest rate environment or other factors that limit the company’s ability to generate growth in investment income or interest rate fluctuations that result in declining values of fixed-maturity investments, including declines in accounts in which we hold bank-owned life insurance contract assets
•Domestic and global events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic instability or recession, that lead to:
◦Significant or prolonged decline in the fair value of a particular security or group of securities and impairment of the asset(s)
◦Significant rise in losses from surety and director and officer policies written for financial institutions or other insured entities
•Our inability to integrate Cincinnati Global and its subsidiaries into our ongoing operations, or disruptions to our ongoing operations due to such integration
•Recession or other economic conditions resulting in lower demand for insurance products or increased payment delinquencies
◦Perceptions that the company’s level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace
◦Inability or unwillingness to nimbly develop and introduce coverage product updates and innovations that our competitors offer and consumers expect to find in the marketplace
◦Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations
◦Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business
◦Add assessments for guaranty funds, other insurance-related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes
◦Increase our provision for federal income taxes due to changes in tax law
•Unforeseen departure of certain executive officers or other key employees due to retirement, health or other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of certain longstanding relationships with insurance agents and others
We have prepared the consolidated financial statements of Cincinnati Financial Corporation and our subsidiaries for the year ended December 31, 2020, in accordance with accounting principles generally accepted in the United States of America (GAAP).
•Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and
The company’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2020, as required by Section 404 of the Sarbanes Oxley Act of 2002. Management’s assessment was based on the criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that the company maintained effective internal control over financial reporting as of December 31, 2020. The assessment led management to conclude that, as of December 31, 2020, the company’s internal control over financial reporting was effective based on those criteria.
The company’s independent registered public accounting firm has issued an audit report on our internal control over financial reporting as of December 31, 2020.
Loss and loss expense reserves are inherently uncertain as to timing and amount and the recorded loss and loss expense reserves may vary materially from the actual ultimate cost of claims. Given the subjectivity in estimating ultimate loss and loss expense reserves, due to uncertainties concerning the future emergence of loss and loss expenses, inflation trends, and the judicial environment, among other factors, auditing loss and loss expense reserves involved an especially high degree of auditor judgment, including the need to involve our actuarial specialists.
•We tested the underlying data that served as the basis for the actuarial analysis, including historical claims data, to test the reasonableness of key inputs to the actuarial estimate.
The Cincinnati Insurance Company leads our insurance group that also includes two subsidiaries: The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group markets a broad range of standard market commercial and personal policies. The group focuses on delivery of quality customer service to our select group of 1,848 independent insurance agencies with 2,578 reporting locations across 45 states. Other subsidiaries of The Cincinnati Insurance Company include: The Cincinnati Life Insurance Company, which markets life insurance and fixed annuities; and The Cincinnati Specialty Underwriters Insurance Company, which offers excess and surplus lines property casualty insurance products. The Cincinnati Insurance Company also conducts the business of our reinsurance assumed operations, Cincinnati Re®.
The World Health Organization declared the 2019 novel coronavirus (SARS-CoV-2 or COVID-19) outbreak a Public Health Emergency of International Concern on January 30, 2020, and a pandemic on March 11, 2020. The pandemic outbreak has caused an economic downturn on a global scale and although many businesses have resumed operations at some capacity, there is still uncertainty surrounding future government and private company restrictions. The pandemic, and unprecedented actions taken to contain the virus, has also continued to cause market disruption and volatility. For 2020, the company estimated that pandemic-related incurred losses and expenses totaled $85 million. The company continues to monitor the impact of the pandemic as it unfolds. The company cannot predict the impact the pandemic will have on its future consolidated financial condition, results of operations and cash flows, however the impact could be material.
Our consolidated financial statements include the accounts of the parent and its wholly owned subsidiaries and are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). The 2019 consolidated financial statements include Cincinnati Global's results for the period from February 28, 2019, through December 31, 2019. Foreign exchange rates related to Cincinnati Global's operations did not have a material impact to our consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.
Fair value is defined as the exit price or the amount that would be (1) received to sell an asset or (2) paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date. When determining an exit price, we rely upon observable market data whenever possible. We primarily base fair value for investments in equity and fixed-maturity securities (including redeemable preferred stock and assets held in separate accounts) on quoted market prices or on prices from the company’s nationally recognized pricing vendors, outside resources that supply global securities pricing, dividend, corporate action and descriptive information to support fund pricing, securities operations, research and portfolio management. The company obtains and reviews the pricing services' valuation methodologies and related inputs and validates these prices by replicating a sample across each asset class using a discounted cash flow model. When a price is not available from these sources, as in the case of securities that are not publicly traded, we determine the fair value using various inputs including quotes from independent brokers. The fair value of investments not priced by the company’s nationally recognized pricing vendors is immaterial.
ownership structure accounted for more than 4% of our total property casualty earned premiums in 2020. We record revenues for installment charges as fee revenues in the consolidated statements of income.
We establish reserves to cover the expected cost of claims, losses and expenses related to investigating, processing and resolving claims. Although the appropriate amount of reserves is inherently uncertain, we base our decisions on past experience and current facts. Reserves are based on claims reported prior to the end of the year and estimates of incurred but not reported (IBNR) claims. We regularly review and update reserves using the most current information available. Any resulting adjustments are reflected in current calendar year insurance losses and policyholder benefits. We estimate that we may recover some of our costs through salvage and subrogation.
We offer several types of life insurance and we account for each according to the duration of the contract. Short-duration life and health contracts are written to cover claims that arise during a short, fixed term of coverage. We generally have the right to change the amount of premium charged or cancel the coverage at the end of each contract term. We record premiums for short-duration life and health contracts similarly to property casualty contracts.
We capitalize acquisition costs for traditional long-duration contracts. We charge these capitalized costs associated with successfully acquiring traditional long-duration contract insurance policies in proportion to premium revenue recognized. We use the same assumptions used in establishing the liability for the contract. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate our deferred acquisition costs for recoverability.
We capitalize acquisition costs associated with successfully acquiring universal life long-duration contracts. We charge these capitalized costs to expenses over the term of coverage of the contract in accordance with the recognition of gross profit from the contract or notional benefit base. When we charge deferred policy acquisition costs to expenses, we use assumptions based on our best estimates of long-term experience. We review and modify these assumptions on a regular basis.
An allowance for credit losses on uncollectible life insurance premiums is updated and reviewed on a quarterly basis. The allowance, including changes in the amount during 2020, was immaterial to our consolidated financial condition, results of operations and cash flows.
Premiums that we cede are deferred and recorded as earned premiums on a pro rata basis over the terms of the contracts. We estimate loss amounts recoverable from our reinsurers based on the reinsurance policy terms. Historically, our claims with reinsurers have been paid.
We sponsor a qualified defined benefit pension plan that was modified during 2008. We closed entry into the pension plan, and only participants 40 years of age or older could elect to remain in the plan. Our pension expenses are based on certain actuarial assumptions and also are composed of several components that are determined using the projected unit credit actuarial cost method. Refer to Note 13, Employee Retirement Benefits, for more information about our defined benefit pension plan.
We grant qualified and nonqualified share-based compensation under authorized plans. The stock options generally vest on a graded scale over three years following the date of grant and are exercisable over 10-year periods. We grant service-based restricted stock units that cliff vest three years after the date of grant as well as service-based restricted stock units that vest ratably over the three-year vesting term. We also grant performance-based restricted stock units that vest if certain market conditions are attained. In 2020, the CFC compensation committee approved share-based awards including incentive stock options, nonqualified stock options, service-based restricted and performance-based restricted stock units. See Note 17, Share-Based Associate Compensation Plans, for further details.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as well as additional implementation related ASU's in 2018, 2019 and 2020. These ASU’s amend previous guidance on the impairment of financial instruments by adding an impairment model that allows an entity to recognize expected credit losses as an allowance rather than impairing as they are incurred. The new guidance is intended to reduce the complexity of credit impairment models and result in a more timely recognition of expected credit losses. The standards require the company to consider all relevant information at the time of estimating the expected credit loss, including past events, the current environment, and reasonable and supportable forecasts over the life of the asset.
These ASU's also eliminated the other-than-temporary impairment model for available for sale fixed-maturity securities by requiring that credit-related impairments be recognized through an allowance account. Changes in the allowance account are recorded in the period of change as a credit loss expense or reversal of credit loss expense. The measurement of credit losses is not impacted, except that credit losses recognized are limited to the amount by which fair value is below amortized cost and that the length of time that a security has been below amortized cost cannot be considered. These ASU's retain the guidance requiring that impaired securities intended to be sold have their amortized cost basis written down to fair value through net income.
In August 2018, the FASB issued ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows. The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts and simplify amortization of deferred acquisition costs while improving and expanding required disclosures. In November 2020, the FASB issued an ASU that delayed the effective date of ASU 2018-12 to interim and annual reporting periods beginning after December 15, 2022. These ASU's have not yet been adopted. Management is currently evaluating the impact on our company's consolidated financial condition, results of operations and cash flows.
At December 31, 2020 and 2019, the company had fixed-maturity investments with a fair value of $121 million and $117 million, respectively, on deposit with various states in compliance with regulatory requirements. In addition, cash and fixed-maturity investments deposited with third parties used as collateral to secure liabilities on behalf of insureds, cedants and other creditors had a fair value of $98 million and $95 million at December 31, 2020 and 2019, respectively.
In the normal course of investing activities, the company enters into investments in limited partnerships, including private equity, real estate investments and asset-backed securities issued by third-parties. The company’s maximum exposure to loss with respect to these investments is limited to the investment carrying values included in the company’s consolidated balance sheets and any unfunded commitments.
The fair value of our equity portfolio was $8.856 billion and $7.752 billion at December 31, 2020 and 2019, respectively. At December 31, 2020 and 2019, Apple, Inc. (Nasdaq:AAPL), an equity holding, was our largest single investment holding with a fair value of $644 million and $414 million, which was 7.5% and 5.5% of our publicly traded common equities portfolio and 3.0% and 2.1% of the total investment portfolio, respectively.
During 2020, there were no fixed-maturity securities with an allowance for credit losses. There were 14 fixed-maturity securities that were written down to fair value, due to an intention to be sold, for holdings in the energy, real estate, consumer goods, municipal and technology & electronics sectors. At December 31, 2020, 128 fixed-maturity investments with a total unrealized loss of $10 million were in an unrealized loss position. Of that total, no fixed-maturity investments had fair values below 70% of amortized cost.
•Level 1 - Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in active markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.
The technique used for the Level 2 fixed-maturity securities is the application of market based modeling. The inputs used for all classes of fixed-maturity securities listed in the table below include relevant market information by asset class, trade activity of like securities, marketplace quotes, benchmark yields, spreads off benchmark yields, interest rates, U.S. Treasury or swap curves, yield to maturity and economic events. Specific to commercial mortgage-backed securities, key inputs also include prepayment and default projections based on past performance of the underlying collateral and current market data. Level 2 fixed-maturity securities are priced by a nationally recognized pricing vendor.
•Level 3 - Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following:
◦Quotes from brokers or other external sources where it cannot be determined that market participants would in fact transact for the asset or liability at the quoted price; or
The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2020 and 2019. We do not have any liabilities carried at fair value. There were no transfers between Level 1 and Level 2.
Recorded reserves for the deferred annuities were $761 million and $760 million at December 31, 2020 and 2019, respectively. Recorded reserves for the structured settlements were $145 million and $151 million at December 31, 2020 and 2019, respectively.
Fair values for structured settlements were calculated based on internally developed models which assume the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2020 and 2019, to account for nonperformance risk. The structured settlements were classified as Level 2 as an active market does not exist, but fair value is based on observable inputs.
Our claims representatives establish case reserves when claims are reported to provide for our unpaid loss and loss expense obligation associated with individual claims.
In 2020, 2019 and 2018, the reserve for loss and loss expense in the consolidated balance sheets also included $69 million, $59 million and $61 million, respectively, for certain life and health loss and loss expense reserves. Additional disclosures for reserves related to these health claims are not material and therefore not provided.
During 2020, we experienced $131 million of favorable development on prior accident years including $95 million of favorable development in commercial lines, $18 million of favorable development in personal lines and $7 million of unfavorable development in excess and surplus lines. Within commercial lines, we recognized favorable development of $54 million for the commercial casualty line, $39 million for the workers' compensation line and $16 million for the commercial property line due to reduced uncertainty of prior accident year loss and loss expense for these lines. This was partially offset by unfavorable development of $17 million for the commercial auto line. Within personal lines, we recognized favorable reserve development of $15 million in personal auto and $5 million for the homeowner line of business.
In the following tables, commercial casualty, workers' compensation and excess and surplus lines each disclose 10 accident years of loss and ALAE reserves and the cumulative number of reported claims. Commercial auto, commercial property, personal auto and homeowner each disclose five accident years of loss and ALAE reserves and the cumulative number of reported claims as each of these lines have five year cumulative average annual percentage payouts of approximately 95% or higher.
We establish reserves for the company’s universal life, deferred annuity and structured settlement policies equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life policies contain no-lapse guarantee provisions. For these policies, we establish a reserve in addition to the account balance, based on expected no-lapse guarantee benefits and expected policy assessments.
We have one unsecured revolving credit facility through multiple commercial banks which was due to expire on February 4, 2025, with the option of a one-year extension remaining from the 2019 amendment. The borrowing capacity is $300 million with an additional $300 million accordion feature. Terms and conditions of the agreement include a debt-to-total capital maximum of 35%. On December 11, 2020, we exercised our option to extend the term of the line of credit one year to February 4, 2026. We had no compensating balance requirements on short-term debt for either 2020 or 2019. At December 31, 2020 and 2019, $54 million and $39 million was drawn on the line of credit, respectively. The interest rate charged on our borrowings on this credit agreement ranged from 1.03% to 4.25% during 2020 and ranged from 2.59% to 3.41% during 2019. In addition, we have letters of credit related to our Cincinnati Re and Cincinnati Global operations with no amounts drawn at December 31, 2020 and 2019.
The finance lease term for equipment and autos is three to six years while the operating lease term for real estate properties is typically five years. Lease obligations totaled $57 million in both 2020 and 2019, respectively. Below are the lease obligations we expect to pay through years 2026 and thereafter including $3 million of interest for finance and operating leases:
The following table provides lease cost and other information for the year ended December 31, 2020 and 2019:
The differences between the 21% statutory federal income tax rate and our effective income tax rate were as follows:
The unrecognized tax benefit liability is carried in other liabilities in the consolidated balance sheets. Included in the unrecognized tax benefit liability as of December 31, 2020 is $34 million that, if recognized, would affect the effective tax rate in the period of the release. Although no interest and penalties currently are accrued, if incurred, they would be recognized as a component of income tax expense. We do not expect any changes to our unrecognized tax benefit liability in the next twelve months.
Cincinnati Global operates in the United Kingdom and as such, is subject to tax in that jurisdiction. The statute of limitation for tax return review by Her Majesty’s Revenue and Customs (HMRC) has closed for tax years ended December 31, 2018 and earlier. There are currently no tax returns under review by HMRC.
Cincinnati Global's operating results for the year ended December 31, 2020, increased their net deferred assets by $15 million with an offsetting increase of $15 million to their valuation allowance. As of December 31, 2020, Cincinnati Global had a net deferred tax asset of $56 million and an offsetting valuation allowance of $56 million.
Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred tax assets will not be realized. After considering all positive and negative evidence, including cumulative losses related to the operations of Cincinnati Global, we believe it was appropriate to set up a valuation allowance for purposes of our opening Cincinnati Global balance sheet and is appropriate to carry a valuation allowance as of December 31, 2020 and 2019.
The sources of dilution of our common shares are certain equity-based awards as discussed in Note 17, Share-Based Associate Compensation Plans. The above table includes the number of anti-dilutive share-based awards at year-end 2020, 2019 and 2018. We did not include these share-based awards in the computation of net income per common share (diluted) because their exercise would have anti-dilutive effects.
We sponsor a qualified defined benefit pension plan that we closed entry into for new associates as of June 30, 2008, and only participants 40 years of age or older as of August 31, 2008, could elect to continue to participate. During 2008, we changed the form of retirement benefit we offer some associates to a company match on contributions to a 401(k) plan as further explained below. For participants remaining in the pension plan, we continue to fund future benefit obligations. Benefits for the defined benefit pension plan are based on years of credited service and compensation level. Contributions are based on the prescribed method defined in the Pension Protection Act. Our net periodic benefit cost is based on certain actuarial assumptions and also is composed of several components that are determined using the projected unit credit actuarial cost method. The qualified plan has been amended to allow for distribution of vested balances to terminated participants.
We sponsor a defined contribution plan (401(k) plan) for eligible associates with matching company contributions totaling $22 million, $19 million and $18 million during the years 2020, 2019 and 2018, respectively. Associates who are not accruing benefits under the pension plan are eligible to receive the company match of up to 6% of cash compensation. Participants vest in the company match for the 401(k) plan after three years of eligible service.
We maintain a supplemental executive retirement plan (SERP) with a benefit obligation of $10 million at
The discount rate was decreased by 0.94 percentage points for the qualified pension plan and 0.92 percentage points for the SERP due to market interest rate conditions at the beginning of 2020. The discount rate assumptions
The 2020 change in the amount recognized in other comprehensive income from 2019 is largely due to changes in the actuarial loss resulting from decreases in discount rates and changes to assumed lump sum basis as discussed above.
Our pension plan assets included 202,337 and 232,113 shares of the company’s common stock at December 31, 2020 and 2019, which had a fair value of $18 million and $24 million at December 31, 2020 and 2019, respectively. The defined benefit pension plan did not purchase any of our common stock during 2020 or 2019. The defined benefit pension plan sold 29,776 shares of our common stock during 2020 and did not sell any shares during 2019. The company paid less than $1 million in 2020 and 2019 in cash dividends on our common stock to the pension plan.
Statutory net income and capital and surplus are determined in accordance with SAP prescribed or permitted by insurance regulatory authorities for five legal entities, our lead insurance subsidiary and its four insurance subsidiaries. Statutory capital and surplus for our insurance subsidiary, The Cincinnati Insurance Company, includes capital and surplus of its four insurance subsidiaries. All capital and surplus amounts exceed statutory risk-based capital requirements. The statutory net income and statutory capital and surplus are presented below:
The company denies the allegations in these lawsuits and intends to continue to vigorously defend the lawsuits. The company maintains that it has no coverage obligations with respect to these lawsuits for business income allegedly lost by the plaintiffs due to the COVID-19 pandemic based on the terms of the applicable insurance policies. Although the policy terms vary in general, the claims at issue in these lawsuits were denied because the policyholder identified no direct physical loss or damage to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any direct physical loss or damage to property in the immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. Depending on the individual policy, additional policy terms and conditions may also prohibit coverage, such as exclusions for pollutants, ordinance or law, loss of use, and acts or decisions. The company’s standard commercial property insurance policies generally did not contain a specific virus exclusion.
In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present a number of uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any class may be certified, and the size and scope of any such classes. The legal theories advanced by plaintiffs vary by case as do the state laws that govern the policy interpretation. These lawsuits are in the early stages of litigation; many complaints continue to be amended; several have been dismissed voluntarily and may be refiled; and others have been dismissed by trial courts. Some early decisions on motion filings have been appealed. Accordingly, little discovery has occurred on pending cases and few substantive legal rulings have been made. In addition, business income calculations depend upon a wide range of factors that are particular to the circumstances of each individual policyholder and, here, virtually none of the plaintiffs have submitted proofs of loss or otherwise quantified or factually supported any allegedly covered loss. Moreover, the company’s experience shows that demands for damages often bear little relation to a reasonable estimate of potential loss. Accordingly, management cannot now reasonably estimate the possible loss or range of loss, if any. Nonetheless, given the number of claims and potential claims, the indeterminate amounts sought, and the inherent unpredictability of litigation, it is possible that adverse outcomes, if any, in the aggregate could have a material adverse effect on the company’s consolidated financial condition, results of operations and cash flows.
Four equity compensation plans currently permit us to grant various types of equity awards. We currently grant incentive stock options, nonqualified stock options, service-based restricted stock units and performance-based restricted stock units to associates, including some with market-based performance objectives under our shareholder-approved plans. We also have a Holiday Stock Plan that permits annual awards of one share of common stock to each full-time associate for each full calendar year of service up to a maximum of 10 shares. One of our equity compensation plans permits us to grant stock to our outside directors as a component of their annual compensation. We used treasury shares for share-based compensation award issues or exercises during 2020 and 2019.
As of December 31, 2020, we had $34 million of unrecognized total compensation cost related to nonvested stock options and restricted stock unit awards. That cost will be recognized over a weighted-average period of 1.7 years.
Stock options are granted to associates at an exercise price equal to the fair value as determined by the average high and low sales price reported on the Nasdaq Global Select Market for the grant date and are exercisable over 10-year periods. The stock options generally vest ratably over a three-year period. In determining the share-based compensation amounts, we estimate the fair value of each option granted on the date of grant using the Black Scholes pricing model. We make the following assumptions to develop the Black Scholes pricing model as follows:
•Weighted-average expected term is based on historical experience of similar awards with consideration for current exercise trends.
Below is a summary of option information for the year 2020:
Cash received from the exercise of options was $7 million, $11 million and $9 million for the years ended December 31, 2020, 2019 and 2018, respectively. We acquired 50,751, 103,237 and 69,649 shares totaling
Under all active shareholder approved plans, a total of 17.3 million shares were authorized to be granted. At December 31, 2020, 7.1 million shares remained available for future issuance under the plans. During 2020, we granted 12,928 shares of common stock to our directors for 2019 board service fees.
Service-based restricted stock units granted to associates are valued at fair value of the shares on the date of grant less the present value of the dividends that holders of restricted stock units do not receive on the shares underlying the restricted stock units during the vesting period. Service-based restricted stock units generally cliff vest three years after the date of grant. We also grant restricted stock units which vest on a three year ratable vesting schedule. Service-based restricted stock units vested during the year had an intrinsic value of $30 million, $25 million and $24 million for the years ended December 31, 2020, 2019 and 2018, respectively.
•Dividend yield has been modeled assuming dividends are reinvested in additional shares of the issuing entity on the ex-dividend date during the performance period.
Below is a summary of service-based and performance-based share information, assuming a target payout for performance-based shares, for the year 2020:
We operate primarily in two industries, property casualty insurance and life insurance. Our chief operating decision maker regularly reviews our reporting segments to make decisions about allocating resources and assessing performance. Our reporting segments are:
•Our investments’ revenues consist of pretax net investment income and investment gains and losses.
•Income before income taxes for the insurance segments is defined as underwriting profit or loss.
◦For commercial lines, personal lines and excess and surplus lines insurance segments, we calculate underwriting profit or loss as premiums earned and fee revenue minus loss and loss expenses and underwriting expenses incurred.
We do not separately report the identifiable assets of property casualty insurance for the commercial, personal and excess and surplus lines segments or for Cincinnati Re because we do not use that measure to analyze performance. We include all investment assets, regardless of ownership, in the investments segment.