The board of directors is committed to rewarding shareholders directly through cash dividends and share repurchase authorizations. Through 2020, the company has increased the annual cash dividend rate for 60 consecutive years, a record we believe is matched by only seven other publicly traded U.S. companies. In addition to regular dividends, strong capital and excellent company performance has provided opportunities to further reward shareholders, including a special dividend paid in December 2017. The board regularly evaluates relevant factors in dividend-related decisions, and the 2020 increase to the regular dividend reflected confidence in our strong capital, liquidity and financial flexibility, as well as progress through our initiatives to improve earnings performance while growing insurance premium revenues. We discuss our financial position in more detail in Liquidity and Capital Resources.
Total investments increased by 9% during 2020 on a fair value basis, with an increase in our securities portfolio valuation that added to a 4% increase in its cost basis. Entering 2021, we believe the portfolio continues to be well diversified and is well positioned to withstand short-term fluctuations. We discuss our investment strategy in Item 1, Investments Segment, and results for the segment in Investments Results. Total assets rose 8%. Shareholders’ equity increased by 9% and book value per share increased by 11%, for reasons discussed in the preceding Executive Summary.
The amount of our debt obligations increased by $15 million in 2020, compared with 2019. Our 7.2% ratio of debt to total capital (debt plus shareholders’ equity) at year-end 2020 decreased by 0.5 percentage points compared with the prior-year ratio.
During much of 2020, the novel coronavirus (SARS-CoV-2 or COVID-19), recognized as a pandemic by the World Health Organization, caused significant economic effects where we operate, including temporary closures of many businesses and reduced consumer spending due to shelter-in-place, stay-at-home and other governmental actions. Those orders and the uncertainty surrounding COVID-19 had broad financial market effects and caused significant market disruption and volatility.
During 2020, pandemic-related incurred losses and expenses totaled $85 million. The total included $30 million for legal expenses in defense of business interruption claims, $19 million for Cincinnati Re® losses, $12 million for Cincinnati Global Underwriting Ltd.SM (Cincinnati Global) losses, $8 million for credit losses related to uncollectible premiums and $16 million for the Stay-at-Home policyholder credit for personal auto policies.
Factors used in estimating reserves for business interruption legal expenses included estimates for attorney fees associated with the defense of such lawsuits filed against the company; litigation trends of such cases, including responding to amended and replead cases and cases on appeal; and trends in judicial decisions in cases filed against the company and other insurers.
Approximately half of the losses for Cincinnati Re represent its estimated share from reinsurance treaties with companies that provided affirmative coverage for pandemic-related business interruption, and most of the remainder is an estimated share of treaties covering professional liability. Most of the losses for Cincinnati Global represent its share of potential losses from business interruption coverage for large risks with customized policy terms and conditions.
Most of our commercial property policies are written to preclude coverage for business interruption claims unless there is direct physical loss or damage to property. For this reason, most of our standard market commercial property policies in states where we actively write business do not contain a specific virus exclusion.
Loss experience for our insurance operations is influenced by many factors, as discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves. Because of various factors that affect exposure to certain insurance losses, such as less miles driven for vehicles or reduced sales and payrolls for businesses, there could be a reduction in future losses, and in some cases a generally corresponding reduction in premiums. Also, there could be losses or legal expenses that increase or otherwise occur independently of changes in sales or payrolls of businesses we insure.
Net income in 2019 increased $1.710 billion, compared with 2018, primarily due to a $1.621 billion increase for 2019 in net investment gains after taxes and a $122 million increase in property casualty underwriting income after taxes.
As discussed in Investments Results, we reported a net investment gain in 2020, primarily due to an $841 million net favorable change in fair value for equity securities still held. In 2019, we reported a net investment gain, including $1.626 billion from a net favorable change in fair value for equity securities still held. For 2018, we reported a net investment loss, primarily due to unfavorable changes in fair values of equity securities, even though we continued to hold the securities.
•Drive premium growth - Implementation of these initiatives is intended to further penetrate each market we serve through our appointed independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Premium growth initiatives also include expansion of Cincinnati Re and Cincinnati Global. Diversified growth also may reduce variability of losses from weather-related catastrophes.
•We expect the independent insurance agency system to remain strong, with continued agency consolidation. If soft insurance market conditions return in the near term, it will create additional risk for agencies.
•Financial markets continued to display volatility in recent years, and some predict more turbulence in the future from effects such as changes in government policy, growth challenges for emerging country economies or other geopolitical events that could also affect the U.S. economy and markets. Should financial markets decline temporarily, which could occur as part of typical market volatility patterns, the related book value component of our value creation ratio could also register a weak or negative result.
For some lines of business that we write, a considerable and uncertain amount of time can elapse between the occurrence, reporting and payment of insured claims. The amount we will actually have to pay for such claims also can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. Gross loss and loss expense reserves were $6.677 billion at year-end 2020 compared with $6.088 billion at year-end 2019.
Our field claims representatives establish case reserves when claims are reported to the company to provide for our unpaid loss and loss expense obligation associated with known claims. Field claims managers supervise and review all claims with case reserves less than $100,000. Additionally, a headquarters supervisor and regional claims manager review all claims under $100,000 if litigation or a certain specialty claim is involved. All claims with case reserves of $100,000 or greater are reviewed and approved by experienced headquarters supervisors and regional claims managers. Upper-level headquarters claims managers also review case reserves of $175,000 or more.
To determine whether an event is designated as a catastrophe, related to premiums written on a direct basis by The Cincinnati Insurance Companies, we generally use the catastrophe definition provided by Property Claims Service (PCS), a division of Insurance Services Office. PCS defines a catastrophe as an event that causes U.S., Puerto Rico and U.S. Virgin Islands damage of $25 million or more in insured property losses and affects a significant number of policyholders and insureds.
•For events designated as natural catastrophes resulting in losses for Cincinnati Re and Cincinnati Global, we begin with a review of in-force policies, treaties and related limits likely to be affected by each event. For both Cincinnati Re and Cincinnati Global, use of information from third-party catastrophe models, industry estimates, and our own proprietary adjustments are utilized for the estimate of ultimate losses for each catastrophe event. Incurred losses from catastrophe events for both Cincinnati Re and Cincinnati Global can be designated catastrophes by PCS, or deemed as a catastrophe by the international insurance industry or, for Cincinnati Re, as reported by ceding companies. IBNR reserves are calculated as the difference between the estimate of the ultimate loss and loss expenses and the sum of total loss and loss expense payments and total case reserves.
•For asbestos and environmental claims, we calculate IBNR reserves by deriving an actuarially-based estimate of total unpaid loss and loss expenses. We then reduce the estimate by total case reserves. We discuss the reserve analysis that applies to asbestos and environmental reserves in Liquidity and Capital Resources, Asbestos and Environmental Loss and Loss Expense Reserves.
•For loss expenses that pertain primarily to salaries and other costs related to our claims department associates, also referred to as adjusting and other expense or AOE, we calculate reserves based on an analysis of the relationship between paid losses and paid AOE. Reserves for AOE are allocated to company, line of business and accident year based on a claim count algorithm. Claim counts reported and used in the reserving process are primarily measured by insurance coverages that are triggered when a loss occurs and a reserve is established. Coverages are defined as unique combinations of certain attributes such as line of business and cause of loss. Claims that are opened and closed without payment are included in the reported claim counts. Claim counts are presented on a direct basis only and do not reflect any assumed or ceded reinsurance.
Our actuarial staff uses diagnostics provided by stochastic reserving software to evaluate the appropriateness of the models and methods listed above. The software’s diagnostics have indicated that the appropriateness of these models and methods for estimating IBNR reserves for our lines of business tends to depend on a line’s tail. Tail refers to the time interval between a typical claim’s occurrence and its settlement. For our long-tail lines such as workers’ compensation, commercial casualty and certain other liability lines, models from the probabilistic trend family tend to provide superior fits and to validate well, compared with models underlying the loss development and Bornhuetter-Ferguson methods. The loss development and Bornhuetter-Ferguson methods, particularly the reported loss variations, tend to produce the more appropriate IBNR reserve estimates for our short-tail lines such as homeowner and commercial property. For our mid-tail lines such as personal and commercial auto liability, all models and methods provide useful insights.
Our actuarial staff also devotes significant time and effort to the estimation of model and method parameters. The loss development and Bornhuetter-Ferguson methods require the estimation of numerous loss development factors. The Bornhuetter-Ferguson methods also involve the estimation of numerous expected loss ratios by accident year. Models from the probabilistic trend family require the estimation of development trends, calendar year inflation trends and exposure levels. Consequently, our actuarial staff monitors a number of trends and measures to gain key business insights necessary for exercising appropriate judgment when estimating the parameters mentioned, such as:
•Exposure levels. Historical earned premiums, when adjusted to reflect common levels of product pricing and loss cost inflation, can serve as a proxy for historical exposures. Our actuaries require this assumption to estimate expected loss ratios and expected DCCE ratios used by the Bornhuetter-Ferguson reserving methods. They may also use this assumption to establish exposure levels for recent accident years, characterized by “green” or immature data, when working with probabilistic trend family models.
•Claims having atypical emergence patterns. Characteristics of certain subsets of claims, such as high frequency, high severity, or mass tort claims, have the potential to distort patterns contained in historical paid loss, reported loss and paid DCCE data. When testing indicates this to be the case for a particular subset of claims, our actuaries segregate these claims from the data and analyze them separately. Subsets of claims that could fall into this category include hurricane claims or claims for other weather events where total losses we incurred were very large, individual large claims and asbestos and environmental claims.
We establish the reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates and investment yields, including a provision for uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. We use both our own experience and industry experience adjusted for historical trends in arriving at our assumptions for expected mortality and morbidity. We use our own experience and historical trends for setting our assumptions for expected withdrawal rates and expenses. We base our assumptions for expected investment income on our own experience adjusted for current and future expected economic conditions.
The application of our invested assets impairment policy resulted in write-downs of impaired securities intended to be sold that reduced our income before income taxes by $78 million in 2020, and other-than-temporary impairment (OTTI) charges of $9 million in 2019 and $5 million in 2018. Write-downs and OTTI losses represent noncash charges to income and are reported as investment losses. The application of our non-invested assets impairment policy did not have a material effect on our financial condition and included a pandemic-related allowance for credit losses for uncollectible premiums of $8 million.
Our internal investment portfolio managers monitor their assigned portfolios. If a fixed-maturity security is valued below amortized cost, the portfolio managers undertake additional reviews. Such declines often occur in conjunction with events taking place in the overall economy and market, combined with events specific to the industry or operations of the issuing organization. Managers review quantitative measurements such as a declining trend in fair value and the extent of the fair value decline, as well as qualitative measures such as pending events, credit ratings and issuer liquidity. We are even more proactive when these declines in valuation are greater than might be anticipated when viewed in the context of overall economic and market conditions. We provide detailed information about fixed-maturity securities fair valued in a continuous loss position at year-end 2020 in Item 7A, Quantitative and Qualitative Disclosures About Market Risk.
An available for sale fixed maturity is impaired if the fair value of the security is below amortized cost. The impaired loss is charged to net income when we have the intent to sell the security or it is more likely than not we will be required to sell the security before recovery of the amortized cost. For impaired securities we intend to hold, an allowance for credit related losses is recorded in investment losses when the company determines a credit loss has been incurred based on certain factors such as adverse conditions, credit rating downgrades or failure of the issuer to make scheduled principal or interest payments. A credit loss is determined using a discounted cash flow analysis by comparing the present value of expected cash flows with the amortized cost basis, limited to the difference between fair value and amortized cost. Noncredit losses are recognized in other comprehensive income as a change in unrealized gains and losses on investments. We provide information about valuations of our invested assets in Item 8, Note 2 of the Consolidated Financial Statements.
For life insurance policies, acquisition costs are amortized into income in proportion to premium revenue, benefit base or in accordance with the recognition of gross profit from the contract, depending on the policy type. These costs are principally agent commissions and underwriting costs related to successful contract acquisition. We analyze our acquisition cost assumptions periodically to reflect actual experience; we evaluate our deferred acquisition costs for recoverability; and we regularly conduct reviews for potential premium deficiencies or loss recognition. Changes in the amounts or timing of estimated future profits could result in adjustments to the accumulated amortization of these costs.
We measure profit or loss for our commercial lines, personal lines, excess and surplus lines and life insurance segments based upon underwriting results (profit or loss), which represent net earned premium less loss and loss expenses, or contract holders’ benefits incurred, and underwriting expenses on a pretax basis. We also evaluate results for our consolidated property casualty insurance operations. That is the total of our standard market segments (commercial lines and personal lines), our excess and surplus lines insurance segment, Cincinnati Re and Cincinnati Global. For analysis of our consolidated property casualty insurance results, it is important to include the earned premiums, loss and loss expenses and also underwriting expenses reported as Other. Underwriting results and segment pretax operating income are not substitutes for net income determined in accordance with GAAP.
For policies that renewed during 2020, higher average pricing offset some of the factors that slowed premium growth. Regardless of future policy submission volume and pricing changes, new business and renewal premium amounts could decline if the exposure basis for policy premiums, such as sales and payrolls of businesses we insure, decrease as a result of a weakened economy.
•Premiums - Agency renewal written premiums rose $221 million in 2020 and continued to contribute to growth in earned premiums and net written premiums that rose in each of our property casualty segments. The renewal premium increase was largely due to average renewal price increases. Price increases with enhanced precision continue to benefit operating results.
Cincinnati Global also contributed to the increase in other written premiums, following our acquisition of it on February 28, 2019. Net written premiums were $177 million in 2020, and contributed $37 million of the growth in other written premiums, compared with 2019. In 2020, earned premiums for Cincinnati Global totaled $168 million.
There was no recovery from reinsurers for losses during 2020 pertaining to the treaty effective June 1, 2020. There was no recovery from reinsurers for losses during 2020 or 2019 pertaining to the treaty effective July 1, 2019. For the treaty effective in July 2018, the aggregate recovery from reinsurers totaled $14 million for incurred losses in 2019, after considering all applicable deductibles, due to adverse reserve development in our personal lines insurance segment from a California wildfire event that occurred during 2018, exhausting the $50 million aggregate limit. During 2018, the aggregate recovery from reinsurers providing coverage totaled $36 million, which was applied to two California wildfire events, including $21 million for Cincinnati Re.
Most of the incurred losses and loss expenses shown in the consolidated property casualty insurance results three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than half of our consolidated property casualty current accident year incurred losses and loss expenses represents net paid amounts, the majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 67.5% accident year 2019 loss and loss expense ratio reported as of December 31, 2019, developed favorably by 1.5 percentage points to 66.0% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2020. Accident years 2019 and 2018 have both developed favorably, as indicated by the progression over time for the ratios in the table.
Catastrophe loss trends, discussed above, accounted for some of the movement in the current accident year loss and loss expense ratio for 2020, compared with 2019. Catastrophe losses added 12.7 percentage points in 2020, 6.6 points in 2019 and 7.4 points in 2018 to the respective consolidated property casualty current accident year loss and loss expense ratios in the table above.
Reserve development on prior accident years continued to net to a favorable amount in 2020, and was primarily due to less-than-anticipated loss emergence on known claims. We recognized $131 million of favorable development in 2020, compared with $248 million in 2019 and $167 million in 2018. Of the $117 million decrease in 2020, compared with 2019, $62 million was attributable to our commercial casualty and workers' compensation lines of business. Approximately 83% of our net favorable reserve development on prior accident years recognized during 2020 occurred in our commercial casualty, workers’ compensation and commercial property lines of business. In 2019, our commercial casualty, commercial property, workers' compensation and personal auto lines of business were responsible for approximately 83% of the favorable reserve development. As discussed in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves, Property Casualty Insurance Development of Estimated Reserves by Accident Year, commercial casualty and workers' compensation are considered long-tail lines with the potential for revisions inherent in estimating reserves. Favorable development recognized during 2018 was primarily from our commercial casualty, commercial property and workers’ compensation lines of business. Development by accident year is further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.
Consolidated property casualty commission expenses rose $53 million, or 5%, in 2020, with profit-sharing commissions for agencies decreasing by $10 million. The 2020 ratio of commission expenses as a percent of earned premiums decreased by 0.3 percentage points, compared with 2019. The 2020 ratio for other underwriting expenses matched 2019, as a Stay-at-Home policyholder credit for personal auto policies offset favorable effects such as a lower level of business travel spending for associates and earned premiums that rose at a slightly faster pace than other underwriting expenses. During 2020, we continued to carefully manage expenses while also making strategic investments that include enhancement of underwriting expertise.
•Premiums - Earned premiums and net written premiums rose in 2020, including a $124 million increase in renewal written premiums that continued to include higher average pricing. New business written premiums in 2020 increased $5 million, or 1%, compared with 2019.
•Combined ratio - The 2020 combined ratio increased by 5.4 percentage points compared with 2019, including a 5.9 percentage-point increase in the ratio component for catastrophe losses. Development on prior accident years’ loss and loss expense reserves before catastrophes during 2020 was 2.7 percentage points less favorable than in 2019.
As discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, stable historical paid loss patterns are a key assumption used to make projections necessary for estimating IBNR reserves. During 2017, we observed paid losses or re-estimates of case reserves emerging at levels higher than expected for commercial casualty, our largest commercial line of business. Considering that new data at December 31, 2017, we estimated commercial casualty IBNR reserves for accident year 2017 at levels more likely to be adequate, and reported net adverse reserve development on prior accident years for calendar year 2017 for that line of business. For 2020, 2019 and 2018, commercial casualty reserve development on prior accident years was favorable, as discussed below. Our commercial casualty 2020 total loss and loss expense ratio was 0.4 percentage points better than in 2019, and in 2019 it was 2.3 percentage points better than in 2018.
For only those commercial lines policies that did expire and were then renewed during 2020, we estimate that the average price increase was near the high end of the mid-single-digit range. During 2020, we continued to further segment our commercial lines policies, emphasizing identification and retention of policies we believed had relatively stronger price adequacy. Conversely, we continued to seek more aggressive renewal terms and conditions on policies we believed had relatively weaker pricing, in turn retaining fewer of those policies.
Other written premiums primarily consist of premiums that are ceded to reinsurers and lower our net written premiums. An increase in ceded premiums reduced net written premium growth by $3 million in 2020.
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. Most of the incurred losses and loss expenses shown in the commercial lines insurance segment three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than half of our commercial lines insurance segment current accident year incurred losses and loss expenses represents net paid amounts, the majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 67.0% accident year 2019 loss and loss expense ratio reported as of December 31, 2019, developed favorably by 1.6 percentage points to 65.4% due to claims settling for less than previously estimated, or due to updates to reserve estimates for unpaid claims, as of December 31, 2020. Accident years 2019 and 2018 for the commercial lines insurance segment have both developed favorably, as indicated by the progression over time of the ratios in the table.
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain some of the movement in the current accident year loss and loss expense ratio for accident year 2020, compared with 2019. Catastrophe losses added 10.8 percentage points in 2020, 5.3 points in 2019 and 6.5 points in 2018 to the respective commercial lines current accident year loss and loss expense ratios in the table above.
Commercial lines reserve development on prior accident years of $95 million in 2020 continued to net to a favorable amount and provided a smaller benefit than the $192 million recognized in 2019. The $97 million net decrease in 2020 included $24 million and $38 million from our commercial casualty and workers' compensation lines of business, respectively. Most of our commercial lines net favorable reserve development on prior accident years recognized during 2020 occurred in our commercial casualty and workers’ compensation lines of business. Favorable development recognized during 2019 and 2018 was also mostly from our commercial casualty and workers’ compensation lines of business. Development by accident year and other trends for commercial lines loss and loss expenses and the related ratios are further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.
Renewal and new business pricing for commercial risks continues to experience significant competitive pressure, reinforcing the need for enhanced pricing analytics and careful risk selection. Commentary regarding the commercial lines market within the property casualty insurance industry indicates commercial lines pricing in 2021 may be generally higher than in 2020. Despite challenging market conditions from strong competition, we believe we can manage our business and execute strategic initiatives to offset market pressures and profitably grow our commercial lines insurance segment.
We intend to keep marketing our products to a broad range of business classes with a total account approach, while also continuing improvement of our pricing precision and further segmentation among commercial lines policies. We intend to maintain our underwriting discipline and carefully manage our rate levels as well as our programs that seek to accurately match exposures with appropriate premiums. We will continue to evaluate each risk on a policy-by-policy basis, making decisions about rates, terms and conditions based on each account’s individual characteristics. For our commercial auto line of business, we will continue to improve premium rate classification and the use of sophisticated rating variables in risk selection and pricing. We believe that our initiatives to improve pricing precision and lower loss costs will continue to benefit commercial lines profitability during 2021, and that recent-year premium growth initiatives will continue to grow commercial lines premiums at a healthy pace.
•Premiums - Earned premiums and net written premiums continued to grow in 2020, primarily due to increases in renewal written premiums that reflected higher average pricing. Renewal written premiums rose $52 million, or 4%, in 2020, compared with 2019. Net written premiums from high net worth policies totaled approximately $519 million in 2020, compared with $408 million in 2019.
Personal lines new business written premiums grew by $16 million, or 10%, during 2020, compared with 2019. The growth reflects multiple factors, including a slowing effect of more stringent underwriting and pricing efforts in selected states during 2019, while maintaining discipline. It also reflects expanded use of enhanced pricing precision tools, including excess and surplus lines homeowner policies we began offering in early 2020. Those homeowner policies contributed $8 million in 2020. Some of what we report as new business came from accounts that were not new to our agents. We believe our agents’ seasoned accounts tend to be priced more accurately than business that may be less familiar to them.
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. Most of the incurred losses and loss expenses shown in the personal lines insurance segment three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since approximately two-thirds of our personal lines current accident year incurred losses and loss expenses represent net paid amounts, the remaining one-third represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 72.1% accident year 2019 loss and loss expense ratio reported as of December 31, 2019, developed favorably by 1.5 percentage points to 70.6% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2020. Accident years 2019 and 2018 for the personal lines insurance segment have both developed favorably, as indicated by the progression over time for the ratios in the table.
Personal lines commission expense as a percent of earned premiums decreased in 2020, compared with 2019, including a decrease in the ratio for profit-sharing commissions for agencies that reflected a higher amount of catastrophe losses. The ratio for 2019 increased compared with 2018, largely due to an increase in the ratio for profit-sharing commissions for agencies. In 2020, other underwriting expenses as a percent of earned premiums increased, compared with 2019, primarily due to the 15% policyholder credit applied to each personal auto policy for the months of April and May 2020. The ratio also reflects ongoing expense management efforts and premium growth outpacing growth in other expenses. Other underwriting expenses as a percent of earned premiums in 2019 increased slightly compared with 2018.
A.M. Best indicates 2020 personal lines direct written premiums for the U.S. property casualty industry grew approximately 1%. Growth for our personal lines insurance segment direct written premiums in 2020 exceeded the industry by approximately 3 percentage points, and we believe it will likely be higher than industry projections for 2021. Drivers of our growth include rate increases, new state entry, accelerated pace of new agency appointments in recent years and increased focus on the high net worth personal lines market.
The COVID-19 pandemic did not have a significant effect on our excess and surplus lines insurance segment premiums during 2020, as net written premiums grew 15%. Premium growth could slow significantly if the basis for policy premiums, such as sales revenue for businesses we insure, decrease as a result of a weakened economy.
Our excess and surplus lines insurance segment includes results of The Cincinnati Specialty Underwriters Insurance Company and CSU Producer Resources Inc. Performance highlights for this segment also included:
•Combined ratio - The combined ratio rose 8.5 percentage points in 2020, primarily due to unfavorable reserve development on prior accident years. The increase reflects more prudent reserving, as claims on average are remaining open longer than previously expected. Components of the 9.3 percentage-point increase in 2020 for the total of loss and loss expense ratios before catastrophe losses, shown in the table above, include an IBNR
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain some of the movement among components of the current accident year loss and loss expense ratio for accident year 2020, compared with 2019. Catastrophe losses added 1.3 percentage points in 2020, 0.4 percentage points in 2019 and 1.1 percentage points in 2018 to the respective excess and surplus lines current accident year loss and loss expense ratios in the table above.
The 57.7% ratio for current accident year loss and loss expenses before catastrophe losses for 2020 increased by 3.1 percentage points compared with the 54.6% accident year 2019 ratio measured as of December 31, 2019. The increase included more prudent reserving discussed above and no change in the ratio for current accident year losses of $1 million or more per claim, shown in the table below.
In 2020, total large losses decreased by $1 million, net of reinsurance. The ratio for 2020 large losses as a percent of earned premiums decreased by 0.6 percentage points. That ratio for 2019 increased by 1.4 points, compared with 2018, as the amount of total large losses incurred more than doubled. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.
Excess and surplus lines commission expense as a percent of earned premiums for 2020 decreased compared with 2019, including a decrease in the ratio for profit-sharing commissions for agencies. The ratio for 2019 also decreased compared with 2018, largely due to a decrease in the ratio for profit-sharing commissions for agencies. The ratio for other underwriting expenses decreased in 2020, reflecting lower levels of business travel spending for associates, in addition to higher earned premiums and ongoing expense management efforts. In 2019, the ratio increased, primarily due to higher internal expense allocations that offset higher earned premiums and ongoing expense management efforts.
The COVID-19 pandemic did not have a significant effect on our life insurance segment earned premiums, benefits or expenses in 2020. However, higher rates of unemployment during the pandemic could result in a significant decrease in premiums of our life insurance products and cause an increase in policy surrender activity in future periods. Specifically, growth in worksite premiums, which originate from enrollments at the workplace, slowed during 2020, and could continue to slow in the future, due to curtailed enrollment activity. It is also possible that we could experience higher than projected future death claims due to the pandemic.
•Profitability - The life insurance segment frequently reports only a small profit or loss because most of its investment income is included in the investments segment results. We include only investment income credited to contract holders (interest assumed in life insurance policy reserve calculations) in life insurance segment results. The segment reported a profit of $11 million in 2020, $1 million in 2019 and $8 million in 2018. It has averaged an annual profit of $4 million over the past five years.
Earned premiums rose $19 million in 2020, primarily due to growth in our term life insurance business, as shown in the table below. Growth in 2019 was also primarily due to term life insurance.
Over the past several years, we have worked to maintain a portfolio of simple, yet competitive, products. Our product development efforts emphasize death benefit protection and guarantees. Distribution expansion within our property casualty insurance agencies remains a high priority. Our 36 life field marketing representatives work in partnership with our property casualty field marketing representatives. Approximately 65% of our term and other life insurance product premiums were generated through our property casualty insurance agency relationships.
•Contract holders’ benefits incurred, related to traditional life and interest-sensitive products, accounted for 77.7% of 2020 total benefits and expenses compared with 76.9% in 2019 and 78.1% in 2018. Total contract holders’ benefits increased as net death claims were higher in 2020, compared with 2019. Net death claims increased in 2020 and were below our mortality projections while remaining within our range of pricing expectations.
•Underwriting expenses incurred, net of deferred acquisition costs, accounted for 22.3% of 2020 total benefits and expenses compared with 23.1% in 2019 and 21.9% in 2018. Expenses in 2020 decreased 1%, compared with 7% growth in earned premiums. Expenses in 2019 increased 15%, compared with 8% growth in earned premiums. In both 2020 and 2019, unlocking of interest rate and other actuarial assumptions decreased the amount of expenses deferred to future periods, increasing underwriting expenses.
The pandemic put a national spotlight on the importance of life insurance. Millennials and Generation Z are now more inclined to consider our product than ever before, and we are convinced that while they may prefer to shop on their own, they want to talk to a professional agent before they buy. We are implementing new digital technologies to help our agents acquire and process new business and are confident that we have plenty of room to grow.
We remain bullish on the voluntary life insurance market as well. While the pandemic made it difficult to do traditional in-person enrollments in 2020, the desire for these products increased, both with employers and their employees. As pandemic-related restrictions begin to ease and new digital enrollment options become more broadly accepted, we expect to see strong growth in this line.
The low interest rate environment continues to persist. We feel comfortable that our focus on term insurance insulates us, to some degree, from the challenges that low rates bring.
•Investment income - Pretax investment income grew $24 million, or 4%, in 2020, due to increases from dividends and interest income. Dividend income grew 9%, reflecting rising dividend rates and net purchases of equity securities from available funds. Interest income grew 2% in 2020, compared with 2019, as net purchases of fixed-maturity securities offset the continuing effects on bond yields of the low interest rate environment. Pretax investment income rose 4% in 2019, primarily due to an increase in dividend income. Average yields in the investment income table below are based on the average invested asset and cash amounts indicated in the table using fixed-maturity securities valued at amortized cost and all other securities at fair value.
•Investment gains and losses - We reported an investment gain for both 2020 and 2019, primarily due to favorable changes in fair values of equity securities even though we continue to hold the securities or as otherwise required by GAAP. For 2018, we reported an investment loss, primarily due to unfavorable changes in fair values of equity securities we continued to hold.
Total investment return of 9.8% in 2020 was 6.8 percentage points less than in 2019. Both the 2020 and 2019 contributions from the investment income component was enhanced by the net favorable effect of the investment gains and losses components. Comparing contributions for 2020 with 2019, investment income rose $24 million, investment gains were $785 million less favorable and the invested assets change in unrealized gains and losses decreased by $108 million. The base component of the return calculation, annual average invested assets, was up 17% in 2020. For 2019 compared with 2018, total investment return increased by 17.3 percentage points, primarily due to a net favorable effect of the investment gains and losses compared with an unfavorable effect in 2018. The base component of the return calculation, annual average invested assets, decreased 1% in 2019.
•Dividend income rose $19 million, or 9%, in 2020, after rising 11% in 2019. Increases in dividend payment rates for most of the holdings in our common stock portfolio during both 2020 and 2019 drove the increases in dividend income. An increase in funds invested in that portfolio during both 2020 and 2019 also favorably affected dividend income.
We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth. In 2021, we expect to continue to allocate a portion of cash available for investment to equity securities, taking into consideration corporate liquidity and income requirements, as well as insurance department regulations and rating agency comments. We discuss our portfolio strategies in Item 1, Our Segments, Investments Segment.
Other loss in the table below represents losses before income taxes. For each year shown, Other loss was largely driven by interest expense from debt of the parent company. Net results for the combination of Cincinnati Re and Cincinnati Global were an underwriting loss of approximately $26 million in 2020 and an underwriting profit of approximately $39 million in 2019. The underwriting loss in 2020 included $31 million of pandemic-related incurred losses and expenses, as discussed in Corporate Financial Highlights of Management’s Discussion and Analysis.
We had a $283 million income tax expense in 2020, compared with $475 million in 2019 and an income tax benefit of $36 million in 2018. Our corporate effective tax rate for 2020 was 18.9% compared with 19.2% in 2019 and negative 14.3% in 2018.
For tax years after 2017, for our property casualty insurance subsidiaries, approximately 75% of interest from tax-advantaged, fixed-maturity investments and approximately 40% of dividends from qualified equities are exempt from federal tax after applying proration. For our noninsurance companies, the dividend received deduction exempts 50% of dividends from qualified equities. Our life insurance company does not own tax-advantaged, fixed-maturity investments or equities subject to the dividend received deduction.
We seek to maintain prudent levels of liquidity and financial strength for the protection of our policyholders, creditors and shareholders. We manage liquidity at two levels to meet the short- and long-term cash requirements of business obligations and growth needs. The first is the liquidity of the parent company. The second is the liquidity of our lead insurance subsidiary. Management of liquidity at both levels is essential because each has different funding needs and sources, and each is subject to certain regulatory guidelines and requirements.
We expect 2021 parent company sources of cash flow to be similar to 2020. Use of liquidity for share repurchases are discretionary depending on cash availability and capital management decisions. Cincinnati Global is required to maintain certain capital funding requirements with Lloyd’s which the parent company may deposit on their behalf. These funding requirements may fluctuate based on the profitability of Cincinnati Global and syndicate solvency capital requirements as set by Lloyd's. Other than share repurchases and funding at Lloyd's, the majority of expenditures for the parent company have been consistent during the last three years, and we expect future expenditures to remain stable.
•$28 million aggregate principal amount of 6.900% senior debentures due 2028.
The company’s senior debt is rated investment grade by four independent rating agencies. None of the rating agencies made changes to our debt ratings in 2020, except for the previously disclosed action by A.M. Best, which upgraded our debt rating from a- to a on January 30, 2020. At February 24, 2021, our debt ratings from the other rating agencies were: A- from Fitch, A3 from Moody’s and BBB+ from S&P.
At year-end 2020, we were in compliance with all covenants under the credit agreement and believe we will remain in compliance. The credit agreement provides alternative interest charges based on the type of borrowing and our debt rating. The interest rate charged is adjusted LIBOR plus an applicable margin. The agreement contains successor LIBOR rate language, which will require an amendment to reflect the new replacement rate. We could be impacted to the extent the replacement rate differs materially from the LIBOR rate.
Capital resources consisting of shareholders’ equity and total debt represent our overall financial strength to support current obligations and growth in our insurance businesses. At December 31, 2020, we had total capital of $11.631 billion. Shareholders’ equity was $10.789 billion, an increase of $925 million, or 9%, from the prior year. Our total debt was $842 million, up $15 million from a year ago. We seek to maintain a solid financial position and provide capital flexibility by keeping our ratio of debt to total capital moderate. At year-end 2020, the ratio was 7.2%, compared with 7.7% at year-end 2019.
At times we enter into letter of credit agreements to support our Cincinnati Re and Cincinnati Global operations. We have an unsecured letter of credit agreement to provide a portion of the capital needed to support Cincinnati Global's obligations at Lloyd's. The amount of this unsecured letter of credit agreement was $94 million with no amounts drawn at December 31, 2020.
•Dividends to shareholders - The ability of our company to continue paying cash dividends is subject to factors the board of directors deems relevant. While the board and management believe there is merit to sustaining the company’s long record of dividend increases, our first priority is the company’s financial strength. Over the past 10 years, the company has paid an average of 65% of net income as dividends. Through 2020, the board had increased our cash dividend for 60 consecutive years. The board's decision in January 2021 to increase the dividend demonstrated confidence in the company’s strong capital, liquidity, financial flexibility and initiatives to grow earnings.
through equity compensation plans, primarily due to vesting of service-based restricted stock units of equity awards granted in the past. The amount of future repurchases may be more, or less, than the past, depending on circumstances and discretion exercised by management. Our corporate Code of Conduct restricts repurchases during certain time periods. The details of the repurchase authorizations and activity are described in Item 5, Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
At December 31, 2020, we believe our most significant other commitments were:
•Other operating expenses - Many of our operating expenses are not contractual obligations but reflect the ongoing expenses of our business.
•Other invested assets - We expect to fund approximately $164 million for our private equity and real estate investments over the next several years.
A long-term perspective governs our liquidity and capital resources decisions, with the goal of benefiting our policyholders, agents, shareholders and associates over time. Our underwriting philosophy and initiatives can drive performance to achieve our underwriting profitability target of a GAAP combined ratio over any five-year
period that consistently averages within the range of 95% to 100%. Our GAAP combined ratio averaged 96.1% over the five-year period 2016 through 2020, resulting in strong underwriting profits.
For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines insurance segment and for other parts of our property casualty insurance operations, the following table details gross reserves among case, IBNR and loss expense reserves, net of salvage and subrogation. The $589 million increase in total gross reserves was primarily due to a $451 million increase in IBNR loss reserves and a $78 million increase in loss expense reserves. The increase in total gross reserves included $133 million for our commercial casualty line of business, $111 million for commercial property, $95 for excess and surplus lines and $113 million for Cincinnati Re.
Reserving data for asbestos and environmental claims has characteristics that limit the usefulness of the methods and models used to analyze loss and loss expense reserves for other claims. Specifically, asbestos and environmental loss and loss expenses for different accident years do not emerge independently of one another as loss development and Bornhuetter-Ferguson methods assume. In addition, asbestos and environmental loss and loss expense data available to date did not reflect a well-defined tail, greatly complicating the identification of an appropriate probabilistic trend family model. At year-end 2020, we used a weighted average of a paid survival ratio method and report year method to estimate reserves for IBNR asbestos and environmental claims. Our exposure to such claims is limited; we believe a weighted average of both methods produces a sufficient level of reserves.
We direct our associates and agencies to settle claims and pay losses as quickly as is practical, and we made $3.183 billion of net claim payments during 2020. At year-end 2020, total net property casualty reserves of $6.400 billion reflected $2.833 billion in unpaid amounts on reported claims (case reserves), $1.284 billion in loss expense reserves and $2.283 billion in estimates of claims that were incurred but had not yet been reported (IBNR). The specific amounts and timing of obligations related to case reserves and associated loss expenses are not set contractually. The amounts and timing of obligations for IBNR claims and related loss expenses are unknown. We discuss our methods of establishing loss and loss expense reserves and our belief that reserves are adequate in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves.
The company established a reasonably likely range for net loss and loss expense reserves of $5.859 billion to $6.543 billion at year-end 2020, with the company carrying net reserves of $6.400 billion. The range was $5.418 billion to $5.862 billion at year-end 2019, with the company carrying net reserves of $5.746 billion. Our loss and loss expense reserves are not discounted for the time-value of money, but we have reduced the reserves by an estimate of the amount of salvage and subrogation payments we expect to recover.
The ranges reflect our assessment of the most likely unpaid loss and loss expenses at year-end 2020 and 2019. However, actual unpaid loss and loss expenses could nonetheless fall outside of the indicated ranges.
Management’s best estimate of total loss and loss expense reserves as of year-end 2020 and 2019 was consistent with the corresponding actuarial best estimate.
Overall favorable development for consolidated property casualty reserves of $131 million in 2020 illustrated the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and workers’ compensation. As noted in Critical Accounting Estimates, Key Assumptions Loss Reserving, our models predict that actual loss and loss expense emergence will differ from projections, and we do not attempt to monitor or identify such normal variations. The table in Property Casualty Loss and Loss Expense Obligations and Reserves shows reserves by segment and lines of business and the components of gross reserves among case, IBNR and loss expense reserves.
•Workers’ compensation - We continue to see favorable reserve development, for all prior accident years in aggregate. During 2020 and 2019, the trend for estimated payments to be made in future calendar years was stable compared with 2018. However, we continue to monitor this line closely, as a sudden increase in trend for future payments has a highly leveraged effect.
•Commercial auto - Loss emergence continued to develop unfavorably during parts of 2020. This line of business has been troublesome for the industry in recent years. As part of the U.S. economic recession several years ago, slowing business activity influenced our estimates of reserves for ultimate losses and loss expenses during that period. As the economy slowly recovered, we believe we were slow to recognize some of the higher loss cost effects in current accident year reserve estimates for at least part of that period. As claims that occurred during that period have become more mature, paid and reported loss cost trends resulted in us increasing our estimated ultimate losses.
For the excess and surplus lines insurance segment, the table showing reserves by segment and lines of business in Property Casualty Loss and Loss Expense Obligations and Reserves, shows the components of gross reserves among case, IBNR and loss expense reserves. Total gross reserves increased $95 million from year-end 2019, largely due to the increase in premiums and exposures for this segment, as we discussed in Excess and Surplus Lines Insurance Results. More prudent reserving, as claims on average are remaining open longer than previously expected, also contributed to the increase. Adverse, or unfavorable, reserve development netted to $7 million during 2020, following favorable development during 2019 of $11 million for excess and surplus lines insurance segment reserves, shown in the table above, illustrates the potential for revisions inherent in estimating reserves.
Our estimates of gross life, annuity and disability obligations do not reflect net recoveries from reinsurance agreements. Ceded life reinsurance receivables were $217 million at year-end 2020. As discussed in 2021 Reinsurance Programs, we purchase reinsurance to mitigate our life insurance risk exposure. At year-end 2020, ceded death benefits represented approximately 34.2% of our total gross policy face amounts in force.
Gross life policy reserves were $2.915 billion at year-end 2020, compared with $2.835 billion at year-end 2019. The increase was primarily due to reserves for traditional life insurance contracts. We establish reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates and investment yields, including a provision for uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. We use both our own experience and industry experience adjusted for historical trends in arriving at our assumptions for expected mortality and morbidity. We use our own experience and historical trends for setting our assumptions for expected withdrawal rates and expenses. We base our assumptions for expected investment income on our own experience adjusted for current and future expected economic conditions.
For 2021, the primary participants on our standard market property and casualty per-risk and per-occurrence reinsurance ceded programs include Hannover Reinsurance Company, Munich Reinsurance America, Partner Reinsurance Company of the U.S. and Swiss Reinsurance America Corporation, all of which had A.M. Best insurer financial strength ratings of A (Excellent) or better as of December 31, 2020. Our property catastrophe program is subscribed through a broker by reinsurers from the United States, Bermuda, London and the European markets. The largest participant in our property catastrophe program, representing approximately 34% of total participation, is the Lloyd's of London placement that features numerous syndicates. Some of the other reinsurers with large participation in the program include the Liberty Syndicate, Lancashire Re, R&V Versicherung AG and Hamilton Re.
The following table shows our five largest property casualty reinsurance receivable amounts by reinsurer at year-end 2020 and 2019. Michigan Catastrophic Claims Association is a mandatory nonprofit association which runs a reinsurance program funded by an annual premium assessment per vehicle. This assessment covers Michigan’s automobile no-fault policies which provide unlimited lifetime coverage for medical expenses resulting from auto accidents. The A.M. Best insurer financial strength ratings as of the end of the two most recent years are also shown for each of those reinsurers that have an applicable rating.
Primary components of the 2021 property and casualty reinsurance program are summarized below. The premium estimates below occurred near the beginning of each respective year, when direct written premiums that were subject to applicable reinsurance treaties were also estimated.
•Property per risk treaty - The primary purpose of the property treaty is to provide capacity up to $50 million, adequate for the majority of the risks we write. It also includes protection for extra-contractual liability coverage losses. We retain the first $10 million of each loss. Losses between $10 million and $50 million are reinsured at 100%. The 2021 ceded premium estimate was $36 million, compared with $31 million for the 2020 estimate.
•Property catastrophe treaty - To protect against catastrophic events such as wind and hail, hurricanes or earthquakes, we purchased property catastrophe reinsurance with a limit up to $800 million. Parts of this treaty include terms and conditions that cover multiple years. As a result, $114 million of coverage in effect for 2021 does not include an exclusion for communicable diseases such as a virus. The remainder of this treaty, and our other property and casualty treaties effective in 2021 include exclusions for communicable disease and cyber losses. Aggregation of losses into one event, sometimes referred to as an hours clause, varies by peril. For example, the general provision in this treaty is 168 hours, but it is 120 hours for a wind event and 96 hours for a riot or civil commotion event. Losses from the same occurrence can be aggregated into one limit over the hour period applicable to the peril causing the loss and applied to the treaty towards recovery. The treaty contains one reinstatement provision. The 2021 ceded premium estimate was $47 million, compared with $44 million for the 2020 estimate. We retain the first $100 million of any loss, and a share of losses up to $800 million. The percentage share we retain for each layer of coverage is indicated below:
After reinsurance, our maximum exposure to a catastrophic event that causes $800 million in covered losses in 2021 would be $202 million, compared with our retention of $249 million for 2020. The largest catastrophe loss event in our history occurred during 2011 from a May 20-27 storm system that included a tornado in Joplin, Missouri, and that also included significant losses from hail in the Dayton, Ohio, area. Our losses from that storm were estimated to be $226 million before reinsurance, based on updated estimates as of December 31, 2017.
A form of reinsurance is also provided through The Terrorism Risk Insurance Act of 2002 (TRIA). TRIA was originally signed into law on November 26, 2002, and extended on several occasions. The most recent extension was signed into law on December 20, 2019, and is scheduled to expire on December 31, 2027. TRIA provides a temporary federal backstop for losses related to the writing of the terrorism peril in property casualty insurance policies. Under regulations promulgated under this statute, insurers are required to offer terrorism coverage for certain lines of property casualty insurance, including property, commercial multi-peril, fire, ocean marine, inland marine, liability, aircraft and workers’ compensation. In the event of a terrorism event defined by TRIA, the federal government would reimburse terrorism claim payments subject to the insurer’s deductible. The deductible is calculated as a percentage of subject written premiums for the preceding calendar year. Our deductible in 2020 was $580 million (20% of 2019 subject premiums), and we estimate it is $610 million (20% of 2020 subject premiums) for 2021.
•Property per risk treaty - The property treaty provides limits up to $5 million, which is adequate capacity for the risk profile we insure. It also includes protection for extra-contractual liability coverage losses. Cincinnati Specialty Underwriters retains the first $1 million of any policy loss. Losses between $1 million and $5 million are reinsured at 100% by The Cincinnati Insurance Company.
•Basket retention - Cincinnati Specialty Underwriters has purchased this coverage to limit their retention to $2 million in the event that the same occurrence results in both a property and a casualty loss.
•Property catastrophe treaty - As a subsidiary of The Cincinnati Insurance Company, Cincinnati Specialty Underwriters is a named insured under our corporate property catastrophe treaty. All terms and conditions of this reinsurance coverage apply to policies underwritten by Cincinnati Specialty Underwriters.
•Effects of the COVID-19 pandemic that could affect results for reasons such as:
◦An unusually high level of claims in our insurance or reinsurance operations that increase litigation-related expenses
◦The number of policyholders that will ultimately submit claims or file lawsuits
◦Differences in state laws and developing case law in the relatively few decisions rendered to date
◦Significant decline in investment income due to reduced or eliminated dividend payouts from a particular security or group of securities
•Difficulties with technology or data security breaches, including cyberattacks, that could negatively affect our ability to conduct business; disrupt our relationships with agents, policyholders and others; cause reputational damage, mitigation expenses and data loss and expose us to liability under federal and state laws
•Disruption of the insurance market caused by technology innovations such as driverless cars that could decrease consumer demand for insurance products
•Increased competition that could result in a significant reduction in the company’s premium volume
•Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could alter our competitive advantages
•Inability to obtain adequate ceded reinsurance on acceptable terms, amount of reinsurance coverage purchased, financial strength of reinsurers and the potential for nonpayment or delay in payment by reinsurers
•Inability to defer policy acquisition costs for any business segment if pricing and loss trends would lead management to conclude that segment could not achieve sustainable profitability
•Inability of our subsidiaries to pay dividends consistent with current or past levels
•Actions of insurance departments, state attorneys general or other regulatory agencies, including a change to a federal system of regulation from a state-based system, that:
◦Impose new obligations on us that increase our expenses or change the assumptions underlying our critical accounting estimates
◦Restrict our ability to execute our business model, including the way we compensate agents
•Events or actions, including unauthorized intentional circumvention of controls, that reduce the company’s future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002
•Events, such as an epidemic, natural catastrophe or terrorism, that could hamper our ability to assemble our workforce at our headquarters location
Deloitte & Touche LLP, our independent registered public accounting firm, audited the consolidated financial statements of Cincinnati Financial Corporation and subsidiaries for the year ended December 31, 2020. Deloitte & Touche LLP met with our audit committee to discuss the results of its audit. They have the opportunity to discuss the adequacy of internal controls and the quality of financial reporting without management present.
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
We have audited the accompanying consolidated balance sheets of Cincinnati Financial Corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the schedules listed in the Index at Item 15(c) (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
The Company’s property and casualty insurance loss and loss expense reserves for long-tailed lines of business, such as workers’ compensation, commercial casualty and certain other liability lines (referred to as “loss and loss expense reserves”), are determined by the Company using actuarial methods, models, assumptions, and judgment to estimate the reserves ("actuarial estimates") required to pay for and settle all outstanding insured claims, including incurred but not reported (IBNR) claims, as of the financial statement date. The actuarial estimates of loss and loss expense reserves are subject to review and adjustment by Company management.
Our audit procedures related to loss and loss expense reserves included the following, among others:
•We tested the effectiveness of controls related to loss and loss expense reserves, including those over the review of methods, models, assumptions and judgments used, and management’s review of the estimate.
•With the assistance of our actuarial specialists, we used the Company’s claims data and other inputs, to develop a range of independent estimates for the loss and loss expense reserves. We used these independent estimates to assess the reasonableness of the Company’s reserves by comparing our estimates to the Company’s recorded loss and loss expense reserves.
Cincinnati Financial Corporation (CFC) operates through The Cincinnati Insurance Company and Cincinnati Global Underwriting Ltd.SM (Cincinnati Global) insurance subsidiaries and two complementary subsidiary companies. Cincinnati Global, our London-based global specialty underwriter, was acquired effective February 28, 2019.
The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. Our actual results could differ from those estimates.
Our portfolio investments are primarily in publicly traded fixed-maturity and equity security investments. Fixed-maturity investments (taxable bonds, tax-exempt bonds, redeemable preferred equities and commercial mortgage- backed securities) classified as available for sale and equity investments (common and nonredeemable preferred equities) are recorded at fair value in the consolidated financial statements. Changes in fair value of fixed-maturity securities are reported in other comprehensive income while equity securities are reported in net income. The number of fixed-maturity securities with fair values below 100% of amortized cost can be expected to fluctuate as interest rates rise or fall. Because of our strong capital and long-term investment horizon, our general intent is to hold fixed-maturity investments until maturity, regardless of short-term fluctuations in fair values.
An available for sale fixed maturity is impaired if the fair value of the security is below amortized cost. The impaired loss is charged to net income when we have the intent to sell the security or it is more likely than not we will be
required to sell the security before recovery of the amortized cost. For impaired securities we intend to hold, an allowance for credit related losses is recorded in investment losses when the company determines a credit loss has been incurred based on certain factors such as adverse conditions, credit rating downgrades or failure of the issuer to make scheduled principal or interest payments. A credit loss is determined using a discounted cash flow analysis by comparing the present value of expected cash flows with the amortized cost basis, limited to the difference between fair value and amortized cost. Noncredit losses are recognized in other comprehensive income as a change in unrealized gains and losses on investments. As securities are sold, we recognize the gain or loss in income based on the trade date.
For the purpose of Accounting Standards Codification (ASC) 825, Financial Instruments disclosure, we estimate the fair value of our long-term senior notes on market pricing of similar debt instruments that are actively trading. We estimate the fair value of our note payable on the year-end outstanding balance because it is short term and tied to a variable interest rate. We estimate the fair value of liabilities for investment contracts and annuities using discounted cash flow calculations across a wide range of economic interest rate scenarios with a provision for our nonperformance risk. We estimate the fair value for policyholder loans on insurance contracts using a discounted cash flow model. Determination of fair value for structured settlements assumes 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, to account for nonperformance risk. See Note 3, Fair Value Measurements, for further details.
An allowance for credit losses on uncollectible property casualty premiums is updated and reviewed on a quarterly basis. At January 1, 2020, the allowance was $9 million. At December 31, 2020, the allowance increased to $19 million, of which a significant portion was due to consideration of pandemic-related factors. Other changes in the amount during 2020 were immaterial.
Generally, investment income and investment gains and losses of the separate accounts accrue directly to the contract holder, and we do not include them in the consolidated statements of income. Revenues and expenses related to separate accounts consist of contractual fees and mortality, surrender and expense risk charges. Also, each separate account BOLI includes a negotiated capital gain and loss sharing arrangement between the company and the bank. A percentage of each separate account’s investment gains and losses representing contract fees and assessments accrues to us and is transferred from the separate account to our general account and is recognized as revenue or expense. We record as revenues separate account investment management fees in fee revenues of the consolidated statements of income.
We enter into other reinsurance transactions to reduce risk and uncertainty by buying property casualty reinsurance and retrocessional reinsurance as well as life reinsurance. Reinsurance and retrocessional reinsurance contracts do not relieve us from our obligation to policyholders, but rather help protect our financial strength to perform that duty. All of these ceded reinsurance contracts transfer the economic risk of loss.
An allowance for credit losses on uncollectible reinsurance premiums and recoverable assets is updated and reviewed on a quarterly basis. The allowances, including changes in the amounts during 2020, were immaterial to our consolidated financial condition, results of operations and cash flows.
We calculate deferred income tax liabilities and assets using tax rates in effect when temporary differences in the consolidated financial statement income and taxable income are expected to reverse. We recognize deferred income taxes for numerous temporary differences between our taxable income and consolidated financial statement income and other changes in shareholders’ equity. Such temporary differences relate primarily to unrealized gains and losses on investments and differences in the recognition of deferred acquisition costs, unearned premiums, insurance reserves and basis differences in the carrying value of investments held. We charge deferred income taxes associated with balances that impact other comprehensive income, such as unrealized gains and losses of fixed-maturity investments, to shareholders’ equity in accumulated other comprehensive income (AOCI). We charge deferred taxes associated with other differences to income.
Our leasing subsidiary provides auto and equipment direct financing (leases and loans) to commercial and individual clients. We generally transfer ownership of the property to the client as the terms of the leases expire. Our lease contracts contain bargain purchase options. We account for these leases and loans as sales-type leases. We capitalize and amortize lease or loan origination costs over the life of the financing, using the effective interest method. These costs may include, but are not limited to finder fees, broker fees, filing fees and the cost of credit reports. We record income as other revenues over the financing term using the effective interest method in the consolidated statements of income. An allowance for credit losses on finance receivables 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.
We recognize goodwill and intangible assets generated through acquisitions within other assets in the consolidated balance sheets. Goodwill arises when the fair value of consideration transferred exceeds the fair value of the net identifiable assets acquired at the acquisition date. Goodwill and intangible assets with an indefinite life are not amortized. Intangible assets with a definite life are amortized on a straight-line basis over the estimated useful lives as follows: broker relationships, 15 years; internally developed technology, five years; value of business acquired, over the remaining coverage period of the underlying insurance contracts, which expired during 2020. We test for impairments on an annual basis or more frequently if events or circumstances indicate that the asset might be impaired. The company performed its annual impairment test on goodwill and intangibles on September 30, which did not result in the recognition of an impairment loss. The company held goodwill of $30 million and intangible assets with an indefinite life of $31 million at December 31, 2020 and 2019, respectively.
The net unrealized investment gains in our fixed-maturity portfolio at December 31, 2020, are primarily the result of the continued low interest rate environment that increased the fair value of our fixed-maturity portfolio. Our commercial mortgage-backed securities had an average rating of Aa1/AA at December 31, 2020 and 2019.
During 2019, we other-than-temporarily impaired three securities. At December 31, 2019, 38 fixed-maturity investments with a total unrealized loss of $3 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70% of amortized cost.
The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2019, and ultimately management determines fair value. Financial instruments reported at fair value in our consolidated financial statements are categorized based upon the following characteristics or inputs to the valuation techniques:
The Level 2 nonredeemable preferred equities technique used is the application of market based modeling. The inputs used, similar to those used by the pricing vendor for our fixed-maturity securities, include relevant market information, trade activity of like securities, yield to maturity, corporate action notices and economic events. Level 2 nonredeemable preferred equities are priced by a nationally recognized pricing vendor.
◦Quotes from brokers or other external sources that are not considered binding;
We also held Level 1 cash and cash equivalents of $900 million and $767 million at December 31, 2020 and 2019, respectively. Level 3 assets reported at fair value in our consolidated financial statements are not material, and therefore no further disclosures are provided.
Fair value of the note payable was determined based upon the outstanding balance at December 31, 2020 and 2019, because it is short term and tied to a variable interest rate. Fair value of the long-term debt was determined under the fair value measurements and disclosure accounting rules based on market pricing of similar debt instruments that are actively trading. We determine fair value for our debt the same way that we value corporate fixed maturities in our investment portfolio. Fair value can vary with macroeconomic conditions. Regardless of the fluctuations in fair value, the outstanding principal amount of our long-term debt is $793 million at both December 31, 2020 and 2019. None of the long-term debt is encumbered by rating triggers. The note payable and long-term debt were classified as Level 2 as an active market does not exist, but fair value is determined based on observable inputs.
Outstanding principal and interest for these life policy loans totaled $33 million and $32 million at December 31, 2020 and 2019, respectively. To determine the fair value, we make the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates, as nonperformance risk is minimal; and (2) the loan repayment rate by which policyholders pay off their loan balances is in line with past experience.
Fair values for deferred annuities were calculated based upon internally developed models because active markets and observable inputs do not exist. To determine the fair value, we made the following significant assumptions: (1) 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; (2) the rate of interest credited to policyholders is the portfolio net earned interest rate less a spread for expenses and profit; and (3) additional lapses occur when the credited interest rate is exceeded by an assumed competitor credited rate, which is a function of the risk-free rate of the economic scenario being modeled.
We use actuarial methods, models, assumptions and judgment to estimate, as of a financial statement date, the property casualty loss and loss expense reserves required to pay for and settle all outstanding insured claims, including IBNR claims, as of that date. The actuarial estimate is subject to review and adjustment by an inter-departmental committee that includes actuarial, claims, underwriting, loss prevention and finance management. This committee is familiar with relevant company and industry business, claims and underwriting trends, as well as general economic and legal trends that could affect future loss and loss expense payments. The amount we will actually have to pay for claims can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate.
During 2018, we experienced $167 million of favorable development on prior accident years including $157 million of favorable development in commercial lines, $13 million of unfavorable development in personal lines, $24 million of favorable development in excess and surplus lines and $1 million of unfavorable development in our reinsurance assumed operations. We recognized favorable development of $58 million for the workers' compensation line and $47 million for both the commercial property line and commercial casualty line due to reduced uncertainty of prior accident year loss and loss expense for these lines.
The following table shows the excess and surplus lines incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:
Expenses directly related to successfully acquired insurance policies - primarily commissions, premium taxes and underwriting costs - are deferred and amortized over the terms of the policies. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate the costs for recoverability. The table below shows the deferred policy acquisition costs and asset reconciliation:
No premium deficiencies were recorded in the consolidated statements of income in 2020, 2019 and 2018, as the sum of the anticipated loss and loss expenses, policyholder dividends and unamortized deferred acquisition expenses did not exceed the related unearned premiums and anticipated investment income.
Declared cash dividends per share were $2.40, $2.24 and $2.12 for the years ended December 31, 2020, 2019 and 2018, respectively.
Our lead insurance subsidiary, The Cincinnati Insurance Company, paid dividends to the parent company of $550 million in 2020, $625 million in 2019 and $500 million in 2018. State regulatory requirements restrict the dividends insurance subsidiaries can pay. Generally, the most our lead insurance subsidiary can pay without prior regulatory approval is the greater of 10% of statutory capital and surplus or 100% of statutory net income for the prior calendar year. Dividends exceeding these limitations may be paid only with approval of the insurance department of the domiciliary state. During 2021, the total that our lead insurance subsidiary may pay in dividends is approximately $583 million.
Dividend payments from Cincinnati Global to the parent company are subject to regulation by U.K. law. Cincinnati Global paid no dividends to the parent company in either 2020 or 2019.
The table below summarizes our consolidated property casualty insurance net written premiums, earned premiums and incurred loss and loss expenses:
The table below summarizes our consolidated life insurance earned premiums and contract holders' benefits incurred:
The ceded benefits incurred can vary depending on the type of life insurance policy held and the year the policy was issued.
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 of taxable income in the carryback and carryforward periods as permitted by law, we believe it is more likely than not that all of the deferred tax assets on our U.S. domestic operations will be realized. As a result, we have no valuation allowance as of December 31, 2020 and 2019 for our U.S. domestic operations. As more fully discussed below, we do carry a valuation allowance on the deferred tax assets related to Cincinnati Global.
For financial reporting purposes, income (loss) before income taxes includes the following components:
As more fully discussed in Note 1, Summary of Significant Accounting Policies, COVID-19 was declared a pandemic on March 11, 2020. In response to the pandemic, various stimulus legislation was enacted in 2020 including the Coronavirus Aid, Relief and Economic Security Act (CARES Act), signed into law on March 27, 2020 and the Consolidated Appropriations Act, 2021 (CAA Act), signed into law on December 27, 2020. We have evaluated both Acts as well as other pandemic-related legislation enacted in 2020 and believe any impact to our financial statements, as a result of such legislation, will be immaterial.
The statute of limitations for federal tax purposes has generally closed for tax years ended December 31, 2016 and earlier, however, as a result of certain net operating loss carryback claims we have filed, the IRS maintains a limited ability to assess tax for the 2015 tax year. In 2019, the IRS began its examination of the tax year ended December 31, 2017 and they have expanded their scope to include tax year ended December 31, 2018. At this time, no adjustments have been proposed. In addition to our IRS filings, we file income tax returns with immaterial amounts in various state jurisdictions and record these amounts in our provision for income taxes for both current and deferred taxes. The statute of limitations for state income tax purposes has closed for tax years ended December 31, 2016 and earlier.
Income taxes paid in our consolidated statements of cash flows are shown net of refunds received. We received no refunds in 2020, $94 million in 2019 and none in 2018.
As of December 31, 2020, and 2019, Cincinnati Global had operating loss carryforwards in the United States of $26 million and $20 million and in the United Kingdom of $108 million and $127 million, respectively. These Cincinnati Global losses can only be utilized within the Cincinnati Global group in both the United States and in the United Kingdom and cannot offset the income of our CFC group domestic operations in the United States.
year-end 2020 and $11 million at year-end 2019, which is included in the projected benefit obligation. The company also makes available to a select group of associates the CFC Top Hat Savings Plan, a nonqualified deferred compensation plan, which had a fair value of $51 million and $45 million at December 31, 2020 and 2019, respectively. Company matching contributions to the CFC Top Hat Savings Plan totaled approximately $1 million for the years 2020, 2019 and 2018, respectively.
To determine the discount rate for each plan, a theoretical settlement portfolio of high-quality rated corporate bonds was chosen to provide payments approximately matching the plan’s projected benefit payments. A single interest rate for each plan was determined resulting in a discounted value of the plan's benefit payments that equates to the market value of the selected bonds. The discount rate is reflective of current market interest rate conditions and our plan's liability characteristics. Based on this analysis, we decreased the rate from the prior year by 0.72 percentage points for the qualified pension plan and by 0.81 percentage points for the SERP. Compensation increase assumptions reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases. The mortality assumption is updated annually to reflect the updated scale. The Pri-2012 tables with Scale MP-2020 and Scale MP-2019 were used for the years 2020 and 2019, respectively. The RP-2014 table projected generationally with Scale MP-2018 was used for the year 2018. The updated mortality table did not have a significant impact on our consolidated financial statements as our qualified plan assumes the majority of benefits will be paid in the form of lump sums.
Our plan was in an unfunded status for 2020 compared to 2019 primarily due to lower year over year return on plan assets, increases in actuarial losses from decreases in discount rates and changes to assumed lump sum basis. The lump sum basis was changed from a Pension Benefit Guaranty Corporation (PBGC) rate, which is no longer being published by the PBGC after December 31, 2020, and mortality rates based on GAM83 tables with minor adjustments, to Internal Revenue Code (IRC) Section 417(e) interest rates and IRC Section 417(e) mortality rates, updated annually and projected into the future. The lump sum basis change resulted in an increase to our actuarial loss at December 31, 2020.
Below are the components of our net periodic benefit cost, as well as other changes in plan assets and benefit obligations recognized in other comprehensive income for our qualified plan and SERP at December 31:
Excluding cash, during 2020 we held approximately 82% of our pension portfolio in domestic common equity investments. The remainder of the portfolio consisted of 9% in United States government fixed-maturity
investments, 6% in domestic corporate fixed-maturity investments and 3% in states, municipalities and taxable political subdivisions fixed-maturity investments. Our common equity portfolio consisted of 26% in the information technology sector, 20% in the financial sector, 13% in the industrial sector, and 12% in the healthcare sector at year-end 2020. No additional sectors accounted for 10% or more of our common equity portfolio balance at year-end 2020.
Investments in securities are valued based on the fair value hierarchy outlined in Note 3, Fair Value Measurements. The pension plan did not have any liabilities carried at fair value during the years ended December 31, 2020 and 2019. There have been no transfers between Level 1 and Level 2 for the years ended December 31, 2020 and 2019. The following table shows the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2020 and 2019. Excluded from the table below is cash on hand of $31 million and $17 million at December 31, 2020 and 2019, respectively.
We estimate $8 million of benefit payments from the SERP during 2021. We expect to make the following benefit payments for our qualified plan and SERP, reflecting expected future service:
$7 million in 2020, $8 million in 2019 and $7 million in 2018, on premium volume of $45 million, $48 million and $45 million for 2020, 2019 and 2018, respectively.
In the ordinary course of conducting business, the company and its subsidiaries are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving the company’s insurance subsidiaries in which the company is either defending or providing indemnity for third-party claims brought against insureds or litigating first-party coverage claims. The company accounts for such activity through the establishment of unpaid loss and loss expense reserves. We believe that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, is immaterial to our consolidated financial condition, results of operations and cash flows.
Beginning in April 2020, like many companies in the property casualty insurance industry, the company’s property casualty subsidiaries, were named as defendants in lawsuits seeking insurance coverage under commercial property insurance policies issued by the company for alleged losses resulting from the shutdown or suspension of their businesses due to the COVID-19 pandemic. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts for claim denials, interest and attorney fees. Some of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages.
The company and its subsidiaries also are occasionally involved in other legal and regulatory proceedings, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a national class. Such proceedings have alleged, for example, breach of an alleged duty to search national databases to ascertain unreported deaths of insureds under life insurance policies. The company’s insurance subsidiaries also are occasionally parties to individual actions in which extra-contractual damages, punitive damages or penalties are sought, such as claims alleging bad faith handling of insurance claims or writing unauthorized coverage or claims alleging discrimination by former or current associates.
On a quarterly basis, we review these outstanding matters. Under current accounting guidance, we establish accruals when it is probable that a loss has been incurred and we can reasonably estimate its potential exposure. The company accounts for such probable and estimable losses, if any, through the establishment of legal expense reserves. Based on our quarterly review, we believe that our accruals for probable and estimable losses are reasonable and that the amounts accrued do not have a material effect on our consolidated financial condition, results of operations and cash flows. However, if any one or more of these matters results in a judgment against us or settlement for an amount that is significantly greater than the amount accrued, the resulting liability could have a material effect on the company’s consolidated financial condition, results of operations and cash flows. Based on our most recent review, our estimate for any other matters for which the risk of loss is not probable, but more than remote, is immaterial.
Share-based compensation cost after tax was $25 million, $24 million and $23 million for the years ended
December 31, 2020, 2019 and 2018, respectively. The related income tax benefit recognized was $6 million,
•Expected volatility is based on our stock price over a historical period that approximates the expected term.
•Dividend yield is determined by dividing the annualized per share dividend by the stock price on the date of grant.
$5 million, $9 million and $5 million, respectively, from associates in consideration for option exercises during 2020, 2019 and 2018. The weighted-average remaining contractual life for options expected to vest as of December 31, 2020, was 8.38 years.
We have performance-based awards that vest on the first day of March after a three-calendar-year performance period. These awards vest according to the level of three-year total shareholder return achieved compared with a peer group over a three-year performance period with payouts ranging from 0% to 200% for awards granted in 2020, 2019 and 2018. Three-year total shareholder return is calculated by using annualized total return of a stock to an investor due to capital gain appreciation plus reinvestment of all dividends.
For the three-year performance period ended December 31, 2020, our total shareholder return exceeded eight of our nine peers. We expect payout of these shares at the maximum level to occur in March of 2021. During 2020, we issued 56,722 shares of performance-based restricted stock units at the target-level performance hurdle for the three-year performance period ended December 31, 2019, as our total shareholder return exceeded five of nine peers in our 2017 peer group. We issued 20,549 shares of performance-based restricted stock units during 2019 at the threshold-level performance hurdle for the three-year performance period ended December 31, 2018, as our total shareholder return exceeded four of nine peers in our 2016 peer group. Performance-based awards vested during the year had an intrinsic value of $5 million, $2 million and $6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
•Expected volatility is based on each company's historical volatility using daily stock price observations with the period commensurate with the performance measurement period.
•Risk-free rates are equal to the yield, as of the measurement date, of the zero-coupon U.S. Treasury bill that is commensurate with the performance measurement period.
We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. We also report as Other the underwriting results of Cincinnati Re and Cincinnati Global.
•Fee revenues for the commercial, personal and excess and surplus insurance segments primarily represent installment fees. Fee revenues for the life insurance segment represent separate account investment management fees.
•Other revenues are primarily finance income and earned premiums of Cincinnati Re and Cincinnati Global.
◦For the life insurance segment, we calculate underwriting profit or loss as premiums earned and fee revenue, minus contract holders’ benefits and expenses incurred, plus investment interest credited to contract holders.
•Income before income taxes for the investments segment is net investment income plus investment gains and losses for investments of the entire company, minus investment interest credited to contract holders of the life insurance segment.
•Loss before income taxes for the Other category is primarily due to interest expense from debt of the parent company, operating expenses of our headquarters and premiums earned minus loss and loss expenses and underwriting expenses of Cincinnati Re and Cincinnati Global.
This table includes unaudited quarterly financial information for the years ended December 31, 2020 and 2019: