Cincinnati Financial Corporation owns our headquarters building located on 102 acres of land in Fairfield, Ohio. This building has 1,508,200 square feet of total space. The property, including land is recorded in our financial statements at $132 million at December 31, 2019, and is classified as land, building and equipment, net, for company use. John J. & Thomas R. Schiff & Co. Inc., a related party, occupies 8,034 square feet (less than 1%). This property is used for the operations described in the Consolidated Financial Statements and accompanying Notes.
Cincinnati Financial Corporation owns Gilmore Pointe, located on the northwest corner of our headquarters property. This four-story building contains approximately 103,000 square feet of usable space. The property is recorded in the financial statements at $5 million at December 31, 2019, and is classified as investment property in Other Invested Assets, net. At December 31, 2019, unaffiliated tenants occupied 86%, Cincinnati Financial affiliates occupy 14%.
Investment income growth, on a pretax basis, had a compound annual growth rate of 3.3% over the five-year period 2015 through 2019.
Over the five years ended December 31, 2019, our equity portfolio compound annual total return was 12.0% compared with a compound annual total return of 11.7% for the Index. Our equity portfolio favors larger-capitalization, high-quality, dividend growing stocks with a slight value orientation. For the year 2019, our equity portfolio total return was 31.9%, compared with 31.5% for the Index.
The amount of our debt obligations increased by $7 million in 2019, compared with 2018. Our 7.7% ratio of debt to total capital (debt plus shareholders’ equity) at year-end 2019 decreased by 1.8 percentage points compared with the prior-year ratio.
Net income in 2018 decreased $758 million, compared with 2017, largely due to a $495 million benefit in 2017 from net deferred income tax liability revaluation due to U.S. tax reform and a $413 million decrease for 2018 in net investment gains after taxes.
Property casualty net written premiums grew 10% and earned premiums grew 8% in 2019, reflecting average renewal price increases, a higher level of insured exposures and premium growth initiatives. The 2019 growth rate for net written premiums exceeded 2018 by 6 percentage points, with Cincinnati Global representing 3 points of the increase. Trends and related factors are discussed in Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance Results, respectively.
We completed our transaction to acquire Cincinnati Global, a London-based global specialty underwriter for Lloyd's Syndicate 318, on February 28, 2019. We expect the transaction to contribute to future earnings and book value growth as we believe it should provide opportunities to support business produced by our independent agencies in new geographies and lines of business. Following the UK's withdrawal from the European Union (Brexit), we expect Cincinnati Global to continue its presence in London. Regardless of the outcome of Brexit, Cincinnati Global is working to advance its business and to attract talent to benefit its expansion. Our costs related to Brexit were immaterial in 2019.
Our property casualty insurance operations generated underwriting profits for each of the three years ending in 2019. The $155 million improvement in 2019, compared with 2018, included a $25 million decrease in losses from natural catastrophe events and $69 million more benefit from net favorable reserve development on prior accident years before catastrophe losses. The $58 million increase in 2018, compared with 2017, included a $7 million increase in losses from natural catastrophe events and $59 million more benefit from net favorable reserve development on prior accident years before catastrophe losses.
Drive premium growth - Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Premium growth initiatives also include expansion of Cincinnati Re and Cincinnati Global. Diversified growth also may reduce variability of losses from weather-related catastrophes.
A return of soft insurance market pricing could significantly affect growth rates and earned premium levels for some time into the future. If the economy falters, we may experience low or no premium growth for our property casualty segments. Premium growth also may lag as some of our growth initiatives require more time to reach their full contribution. In addition, economic factors, including inflation, may increase our claims and settlement expenses related to medical care, litigation and construction.
The table below provides standard errors and reserve ranges by major property casualty lines of business and in total for net loss and loss expense reserves as well as the potential effects on our net income, assuming a 21% federal tax rate. Standard errors and reserve ranges for assorted groupings of these lines of business cannot be computed by simply adding the standard errors and reserve ranges of the component lines of business, since such an approach would ignore the effects of product diversification. See Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves, Range of Reasonable Reserves, for more details on our total reserve range. While the table reflects our assessment of the most likely range within which each line’s actual unpaid loss and loss expenses may fall, one or more lines’ actual unpaid loss and loss expenses could nonetheless fall outside of the indicated ranges.
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, the extent of the fair value decline and the length of time the value of the security has been depressed, 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 information about valuations of our invested assets in Item 8, Note 2 of the Consolidated Financial Statements.
Fixed-maturity securities that have previously been other-than-temporarily impaired are evaluated based on their adjusted cost or amortized cost and further written down if deemed appropriate. We provide detailed information about fixed-maturity securities fair valued in a continuous loss position at year-end 2019 in Item 7A, Application of Asset Impairment Policy.
Substantially all of the $19.450 billion of securities in our investment portfolio at year-end 2019, measured at fair value, are classified as Level 1 or Level 2. Financial assets that fall within Level 1 and Level 2 are priced according to observable data from identical or similar securities that have traded in the marketplace. Also within Level 2 are securities that are valued by outside services or brokers where we have evaluated and verified the pricing methodology and determined that the inputs are observable.
For property casualty insurance policies, deferred acquisition costs are amortized over the terms of the policies. These costs are principally agent commissions, premium taxes and certain underwriting costs related to successful contract acquisition, which are deferred and amortized into net income as premiums are earned. We assess recoverability of deferred acquisition costs at a level consistent with the way we acquire, service and manage insurance policies and measure profitability. Deferred acquisition costs track with the change in premiums.
Earned and net written premiums for our consolidated property casualty operations grew in 2019, reflecting average renewal price increases, a higher level of insured exposures and strategic initiatives for targeted growth. A key measure of property casualty profitability is underwriting profit or loss. Our 2019 underwriting profit of $341 million was $155 million more than in 2018, including a $25 million favorable effect from a lower amount of natural catastrophe losses, mostly caused by severe weather. Prior accident year loss experience before catastrophes during 2019 was more favorable than in 2018, and represented $69 million of the 2019 underwriting profit increase. Improved profitability also included other factors, such as higher pricing, and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices. Underwriting profit trends are discussed further below.
New business written premiums produced through agencies increased $126 million in 2019, compared with 2018. Agents appointed during 2019 or 2018 produced a 2019 increase in standard lines new business of $46 million. Growth initiatives also favorably affect growth in subsequent years, particularly as newer agency relationships mature over time.
Combined ratio - The 2019 combined ratio improved by 2.6 percentage points compared with 2018, including a 1.1 percentage-point decrease in the ratio for natural catastrophe losses. The 2019 ratio for current accident year losses and loss expenses before catastrophes improved by 0.6 percentage points, reflecting a decrease in commercial lines large losses for new losses above $1 million described below, and what we believe are improvements to some of our loss experience due to recent-year initiatives to improve pricing precision and claims and loss control practices. The remainder of the 2019 combined ratio decrease included 1.0 percentage points more benefit in the ratio for prior accident year losses and loss expenses before catastrophes. We further discuss ratios related to reserve development in the sections that follow the Catastrophe Losses Incurred table below.
Catastrophe loss trends are an important factor in assessing trends for overall underwriting results. Our 10-year historical annual average contribution of catastrophe losses to the combined ratio was 6.8 percentage points at December 31, 2019. Our five-year average was 6.4 percentage points.
segment from a California wildfire event that occurred during 2018, exhausting the $50 million aggregate limit. During 2018, the aggregate recovery from reinsurers providing coverage totaled $36 million, which was applied to two California wildfire events, including $21 million for Cincinnati Re.
The following table shows catastrophe losses incurred for the past two calendar years, net of reinsurance, as well as the effect of loss development on prior period catastrophe reserves. We individually list declared catastrophe events for which our incurred losses reached or exceeded $10 million.
Consolidated property casualty commission expenses rose $78 million, or 9%, in 2019, with profit-sharing commissions for agencies increasing by $12 million. The 2019 ratio of commission expenses as a percent of earned premiums increased by 0.1 percentage points, compared with 2018. The 2019 ratio for other underwriting expenses also increased by 0.1 percentage points, as earned premiums rose at a slightly slower pace than other underwriting expenses. During 2019, we continued to carefully manage expenses while also making strategic investments that include enhancement of underwriting expertise.
Combined ratio - The 2019 combined ratio improved by 2.5 percentage points compared with 2018, including a 1.3 percentage-point decrease in the ratio component for natural catastrophe losses. Development on prior accident years’ loss and loss expense reserves before catastrophes during 2019 was 0.8 percentage points more favorable than in 2018.
Commercial auto, representing 21% of 2019 earned premiums for our commercial lines insurance segment, was the only major line of business in that segment with a 2019 total loss and loss expense ratio significantly higher than we desired, although it was 7.9 percentage points better than in 2018. During 2019, our commercial auto policies experienced average renewal price percentage increases estimated in the high-single-digit range, which we believe will help improve future profitability. We also continued to improve premium rate classification and use of other rating variables in risk selection and pricing.
For only those commercial lines policies that did expire and were then renewed during 2019, we estimate that the average price increase was near the low end of the mid-single-digit range. During 2019, 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.
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 68.6% accident year 2018 loss and loss expense ratio reported as of December 31, 2018, developed favorably by 2.1 percentage points to 66.5% due to claims settling for less than previously estimated, or due to updates to reserve estimates for unpaid claims, as of December 31, 2019. Accident years 2018 and 2017 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 2019, compared with 2018. Catastrophe losses added 5.3 percentage points in 2019, 6.5 points in 2018 and 5.7 points in 2017 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 $192 million in 2019 continued to net to a favorable amount and provided a larger benefit than the $157 million recognized in 2018. The $35 million net increase in 2019 included $31 million from our commercial casualty line of business. Most of our commercial lines net favorable reserve development on prior accident years recognized during 2019 occurred in our commercial casualty and workers’ compensation lines of business. Favorable development recognized during 2018 was mostly from our commercial casualty, commercial property and workers’ compensation lines of business. Favorable development recognized during 2017 was mostly from our commercial property 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.
Commercial lines commission expenses as a percent of earned premiums increased in 2019, compared with 2018, reflecting an increase in the ratio for profit-sharing commissions for agencies. The ratio for 2018 increased compared with 2017, reflecting an increase in the ratio for agency commissions other than profit-sharing. In 2019, other underwriting expenses as a percent of earned premiums matched 2018. In 2018, the ratio decreased, compared with 2017, as earned premiums rose at a faster pace than other underwriting expenses.
We are building commercial lines to an even larger percentage of our agencies total portfolio, whether it’s through enhanced expertise or flexibility in processes and service. Our goal is to be the first and last solution when our agencies are considering business placement.
Premiums - Earned premiums and net written premiums continued to grow in 2019, driven by increases in renewal written premiums that reflected higher average pricing. Renewal written premiums rose $71 million, or 6%, in 2019, compared with 2018. Net written premiums from high net worth policies totaled approximately $408 million in 2019, compared with $309 million in 2018.
Our homeowner line of business, representing 43% of 2019 earned premiums for our personal lines insurance segment, was the only major line of business in that segment with a 2019 total loss and loss expense ratio significantly higher than we desired. During 2019, our homeowner policies experienced estimated premium rate increases averaging in the mid-single-digit percentage range, higher in that range than they experienced in 2018. We believe the rate increases and other actions to improve pricing precision and reduce loss costs will improve future profitability, similar to the recent-year improvement experienced in our personal auto line of business.
Personal lines new business written premiums decreased by $7 million, or 4%, during 2019, compared with 2018. The decrease reflected underwriting and pricing discipline, particularly in select states. Some of what we report as new business came from accounts that were not new to our agents. We believe our agents’ seasoned accounts tend to be priced more accurately than business that may be less familiar to them.
Other written premiums primarily consist of premiums that are ceded to reinsurers and lower our net written premiums. An increase in ceded premiums reduced net written premium growth by $6 million more in 2019, compared with 2018.
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 71.9% accident year 2018 loss and loss expense ratio reported as of December 31, 2018, developed favorably by 0.8 percentage points to 71.1% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2019. Accident year 2017 for the personal lines insurance segment developed unfavorably during 2018 and then developed favorably during 2019, as indicated by the progression over time for the ratios in the table.
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain much of the movement in the current accident year loss and loss expense ratio for accident year 2019, compared with accident year 2018. Catastrophe losses added 9.7 percentage points in 2019, 9.1 points in 2018 and 11.2 points in 2017 to the respective personal lines current accident year loss and loss expense ratios in the table above. Personal lines catastrophe losses for 2019 resulted in a ratio lower than our 10.9% 10-year annual average for personal lines that included 22.8% for 2011. Personal lines catastrophe losses are inherently volatile, as discussed above and in Consolidated Property Casualty Insurance Results.
The 62.4% ratio for current accident year loss and loss expenses before catastrophe losses for 2019 improved 0.4 percentage points compared with the 62.8% accident year 2018 ratio measured as of December 31, 2018. The improvement was partially offset by a 0.8 percentage-point increase in the ratio for current accident year losses of $1 million or more per claim, shown in the table below, primarily due to higher amounts of large losses for our homeowner line of business. Other contributions included favorable effects from various initiatives, such as those to improve pricing precision and loss experience related to claims and loss control practices.
Personal lines loss and loss expense reserve development on prior accident years recognized in 2019 was favorable by $27 million, in aggregate, compared with $13 million of unfavorable reserve development in 2018. The 2019 net favorable reserve development included $26 million for our personal auto line of business, primarily for accident year 2018. In 2018, our homeowner line of business prior accident year net reserve development was unfavorable by $24 million and was partially offset by favorable reserve development for personal auto. Development by accident year and other trends for personal lines loss and loss expenses and the related ratios are further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.
Personal lines commission expense as a percent of earned premiums increased in 2019, compared with 2018, largely due to an increase in the ratio for profit-sharing commissions for agencies. The ratio for 2018 increased compared with 2017. In 2019, other underwriting expenses as a percent of earned premiums increased, compared with 2018, as strategic investments that include enhancement of underwriting expertise offset the favorable effects of higher earned premiums and ongoing expense management efforts. Other underwriting expenses as a percent of earned premiums in 2018 decreased slightly compared with 2017.
A.M. Best indicates 2019 personal lines direct written premiums for the U.S. property casualty industry grew slightly less than 4%, based on industry data reported through the first nine months of 2019. Growth for our personal lines insurance segment direct written premiums in 2019 exceeded the industry by nearly one percentage point, and we believe it will likely be higher than industry projections for 2020. 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 54.6% ratio for current accident year loss and loss expenses before catastrophe losses for 2019 increased by 0.7 percentage points compared with the 53.9% accident year 2018 ratio measured as of December 31, 2018. The increase was driven by a 0.7 percentage-point increase in the ratio for current accident year losses of $1 million or more per claim, shown in the table below.
Excess and surplus lines reserve development on prior accident years continued to net to a favorable amount in 2019 as $11 million was recognized, compared with $24 million in 2018. Approximately three-fourths of the 2019 favorable development was for accident years 2018, 2017 or 2016, in aggregate, and was primarily due to lower-than-anticipated loss emergence on known claims.
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 35 life field marketing representatives work in partnership with our 144 property casualty field marketing representatives. Approximately 55% of our term and other life insurance product premiums were generated through our property casualty insurance agency relationships.
Underwriting expenses incurred, net of deferred acquisition costs, accounted for 23.1% of 2019 total benefits and expenses compared with 21.9% in 2018 and 23.9% in 2017. Expenses in 2019 increased 15%, compared with 8% growth in earned premiums. Expenses in 2018 decreased 5%, compared with 8% growth in earned premiums. In 2019, unlocking of interest rate and other actuarial assumptions decreased the amount of expenses deferred to future periods, increasing underwriting expenses. In 2018, unlocking of interest rate and other actuarial assumptions increased the amount of expenses deferred to future periods, decreasing underwriting expenses.
We maintain a positive outlook on the life insurance market. The opportunities to cross-serve our property casualty agencies continue to expand in parallel with that segment’s impressive growth. Our model, which emphasizes personal service and relationships, is becoming more and more valued as so many of our competitors shift their attention to distribution models that cut the agent out of the transaction.
Our innovation efforts and teamwork across departments continue to uncover new ways for us to increase sales by presenting our agents with unique opportunities to provide financial protection products to their best customers. We are also using innovation teams to help improve our worksite capabilities as we continue to see excellent growth in the voluntary benefit space.
Principle-based reserves had a positive impact on our statutory operating results, and we expect this to continue into 2020 and beyond. Such results will allow us more options with respect to capital management.
The investments segment contributes investment income and investments gains and losses to results of operations. Investment income is generally our primary source of pretax and after-tax profits.
Interest income of $446 million in 2019 increased by $1 million, compared with 2018. The average fixed-maturity pretax yield declined by approximately 15 basis points but was offset by a larger average fixed-maturity portfolio that rose 4% on an amortized cost basis. Interest income in 2018 matched 2017 when that yield declined by approximately 17 basis points while the portfolio rose 4% on an amortized cost basis.
In 2019, we continued to invest available cash flow in both fixed income and equity securities in a manner that we believe balances current income needs with longer-term invested asset growth goals. While our bond portfolio more than covers our insurance reserve liabilities, we believe our diversified common stock portfolio of mainly blue chip, dividend-paying companies represents one of our best investment opportunities for the long term. We position our portfolio with consideration to both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield. The table below summarizes pretax yield to amortized costs excluding any book value adjustments due to impairment for bonds in our fixed-maturity portfolio by various maturity periods.
OTTI charges from the investment portfolio by the asset classes we described in Item 1, Our Segments, Investments Segment, are summarized below:
In a reversal of the prior year, bond prices rallied in 2019 as treasury yields contracted and corporate credit spreads narrowed considerably. While redemptions of higher coupon bonds purchased during and shortly after the financial crisis have slowed, the decline in available new money rates will provide a challenge to grow interest income.
Total revenues in 2019 for our Other operations increased, compared with 2018, primarily due to earned premiums of Cincinnati Re and Cincinnati Global. Other also includes noninvestment operations of the parent company and its commercial leasing and financial services subsidiary, CFC Investment Company. Total expenses for Other also increased in 2019, primarily due to losses and loss expenses and underwriting expenses from Cincinnati Re and Cincinnati Global.
Other loss in the table below represents losses before income taxes. For each year shown, Other loss was largely driven by interest expense from debt of the parent company. Net results for the combination of Cincinnati Re and Cincinnati Global were an underwriting profit of approximately $39 million in 2019, following underwriting losses for Cincinnati Re of approximately $8 million in 2018 and $20 million in 2017, reflecting significant amounts of natural catastrophe losses.
We had a $475 million income tax expense in 2019 compared with a $36 million income tax benefit in 2018 and $315 million of income tax benefit in 2017. Our corporate effective tax rate for 2019 was 19.2% compared with negative 14.3% in 2018 and negative 43.2% in 2017.
At December 31, 2019, the parent company had $3.315 billion in cash and marketable securities, providing strong liquidity to fund cash outflows, as needed. The payment of dividends to shareholders is largely based upon receiving subsidiary dividends. Alternatively, we could sell investments or use our line of credit to support the dividend payment.
Dividends received from the lead subsidiary in 2019 were $125 million more than in 2018, supported by strong property casualty insurance net cash flow from operating activities. We expect 2020 parent company sources of cash flow to be similar to 2019. Use of liquidity for share repurchases are discretionary depending on cash availability and capital management decisions. The majority of expenditures for the parent company have been consistent during the last three years, and we expect future expenditures to remain stable.
The parent company’s lead insurance subsidiary is largely the operations of the property casualty segments. The primary sources of cash inflows are collection of premiums, investment income, maturity of fixed-income securities and sale proceeds from investments. Property casualty insurance premiums generally are received before losses are paid under the policies purchased with those premiums. Cash outflows are primarily loss and loss expenses, commissions, salaries, taxes, operating expenses and investment purchases. Over the three-year period ended December 31, 2019, premium receipts and investment income have been more than sufficient to pay claims and operating expenses. Excess cash flows were partially used to pay dividends to the parent company. We are not aware of any known trends that would materially change historical cash flow results other than fluctuations in catastrophe claims and other large losses either individually or in aggregate.
We provide details of our three long-term notes in Item 8, Note 8 of the Consolidated Financial Statements. None of the notes are encumbered by rating triggers. The total principal amount of our long-term debt at December 31, 2019, was $793 million and included:
At year-end 2019, 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.
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 $131 million with no amounts drawn at December 31, 2019.
Dividends to shareholders - The ability of our company to continue paying cash dividends is subject to factors the board of directors deem 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 69% of net income as dividends. Through 2019, the board had increased our cash dividend for 59 consecutive years. The board's decision in January 2020 to increase the dividend demonstrated confidence in the company’s strong capital, liquidity, financial flexibility and initiatives to grow earnings.
Common stock repurchase - Generally, our board believes that share repurchases can help fulfill our commitment to enhancing shareholder value. Consequently, the board has authorized the repurchase of outstanding shares, giving management discretion to purchase shares at reasonable prices in light of circumstances at the time of purchase. Our approach has been to hold capital adequate to support future growth of our insurance operations and repurchase shares at management's discretion. Repurchases are intended to offset the issuance of shares through equity compensation plans, primarily due to vesting of service-based
At December 31, 2019, we believe our most significant other commitments were:
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 94.7% over the five-year period 2015 through 2019, resulting in strong underwriting profits.
We are currently in the process of identifying our population of contracts that contain a LIBOR reference to determine our exposure. Our identification to date is primarily related to our line of credit, an unsecured letter of credit agreement to provide a portion of the capital needed to support obligations at Lloyd's, investments in floating rate securities and late fee provisions. We will continue to work with counterparties to assess alternative rates for each contract identified.
Our estimate of future gross property casualty loss and loss expense payments of $6.088 billion is lower than loss and loss expense reserves of $6.147 billion reported on our balance sheet at December 31, 2019. The $59 million difference is due to certain life and health loss reserves. Reserving practices are discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves.
For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines insurance segment and for other parts of our property casualty insurance operations, the following table details gross reserves among case, IBNR and loss expense reserves, net of salvage and subrogation. The $442 million increase in total gross reserves was primarily due to a $240 million increase in case loss reserves and a $155 million increase in IBNR loss reserves. Cincinnati Global, acquired during 2019, represented $228 million of the increase in total gross reserves at year-end 2019, while our commercial property line of business increased by $81 million, our excess and surplus lines business increased by $53 million, and Cincinnati Re increased by $50 million.
We carried $85 million of net loss and loss expense reserves for asbestos and environmental claims and $43 million of reserves for mold claims at year-end 2019, compared with $89 million and $44 million, respectively, for such claims at year-end 2018. The asbestos and environmental claims amounts for each respective year constituted 1.5% and 1.6% of total net loss and loss expense reserves at these year-end dates.
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 2019, 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.
Our estimates of gross property casualty loss and loss expense payments do not include reinsurance receivables or ceded losses. As discussed in 2020 Reinsurance Ceded Programs, we purchase reinsurance to mitigate our property casualty risk exposure. Ceded property casualty reinsurance unpaid receivables of $342 million at year-end 2019 are an offset to our gross property casualty loss and loss expense obligations. Our reinsurance program mitigates the liquidity risk of a single large loss or an unexpected rise in claim severity or frequency due to a catastrophic event. Reinsurance does not relieve us of our obligation to pay covered claims. The financial strength of our reinsurers is important because our ability to recover losses under our reinsurance agreements depends on the financial viability of the reinsurers.
The company established a reasonably likely range for net loss and loss expense reserves of $5.418 billion to $5.862 billion at year-end 2019, with the company carrying net reserves of $5.746 billion. The likely range was $5.037 billion to $5.481 billion at year-end 2018, with the company carrying net reserves of $5.408 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.
Management’s best estimate of total loss and loss expense reserves as of year-end 2019 and 2018 was consistent with the corresponding actuarial best estimate.
The following table shows net reserve changes at year-end 2019, 2018 and 2017 by property casualty segment and accident year:
Overall favorable development for consolidated property casualty reserves of $248 million in 2019 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.
Our estimates of gross life, annuity and disability obligations do not reflect net recoveries from reinsurance agreements. Ceded life reinsurance receivables were $231 million at year-end 2019. As discussed in 2020 Reinsurance Programs, we purchase reinsurance to mitigate our life insurance risk exposure. At year-end 2019, ceded death benefits represented approximately 35.3% of our total gross policy face amounts in force.
To help determine appropriate reinsurance coverage for hurricane, earthquake and tornado/hail exposures, for business other than Cincinnati Re and Cincinnati Global we use the RMS and AIR models to estimate the probable maximum loss from a single event or multiple events occurring in a one-year period. The models are proprietary in nature, and the vendors that provide them periodically update the models, sometimes resulting in significant changes to their estimate of probable maximum loss. As of the end of 2019, both models indicated that a hurricane event represents our largest amount of exposure to losses. The table below summarizes estimated probabilities and the corresponding probable maximum loss from a single hurricane event occurring in a one-year period, for business other than Cincinnati Re and Cincinnati Global, and indicates the effect of such losses on consolidated shareholders’ equity at December 31, 2019. Net losses are net of reinsurance, estimated reinstatement premiums and income taxes, assuming a 21% federal tax rate, and assume our 2020 reinsurance programs apply.
For 2020, 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, 2019. 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 44% of total participation, is the Lloyd's of London placement that features numerous syndicates, with AXA XL and Liberty taking the largest participations. Other primary participants in our property catastrophe program include Mapfre, Axis and Fidelis.
The following table shows our five largest property casualty reinsurance receivable amounts by reinsurer at year-end 2019 and 2018. 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 are rated by Best.
Primary components of the 2020 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 excess treaty - We purchased a property reinsurance treaty that provides an additional $50 million in protection for property losses. This treaty, along with the property per risk treaty, provides a total of $100 million of protection. The 2020 ceded premium estimate was approximately $3 million, compared with $2 million for the 2019 estimate.
Casualty excess treaty - We purchase a casualty reinsurance treaty that provides an additional $45 million in protection for certain casualty losses. This treaty, along with the casualty per occurrence treaty, provides a total of $70 million of protection for workers’ compensation, extra-contractual liability coverage and clash coverage losses, which would apply when a single occurrence involves multiple policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The 2020 ceded premium estimate was approximately $3 million, essentially unchanged from the 2019 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. Losses from the same occurrence can be aggregated into one limit over a 120-hour period and applied to the treaty towards recovery. The treaty contains one reinstatement provision. The coverage layer between $600 million and $800 million is a new feature in 2020 and includes coverage for Cincinnati Global, while the other layers exclude it. A portion of the layer provides an additional $60 million of earthquake-only coverage but does not include coverage for Cincinnati Global. The 2020 ceded premium estimate was $44 million, compared with $43 million for the 2019 estimate with its limit of $600 million. 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:
Effective July 1, 2019, we renewed our property catastrophe occurrence and aggregate excess of loss treaty for a period of one year. The treaty has a total limit of $50 million for all coverages combined, with various combinations of occurrences for coverage up to the $50 million aggregate limit. The combined coverage noted below applies to business written on a direct basis and by Cincinnati Re. Cincinnati Global catastrophe losses are not applicable to the treaty. Ceded premiums for the one-year renewal period of coverage from this treaty are estimated to be approximately $9 million. Key coverages are summarized below.
Combined - Aggregate net recovery up to $50 million after retaining the first $125 million of each loss
Cincinnati Re-only - Aggregate net recovery up to $8 million after retaining the first $45 million in aggregate
Brushfire or wildfire: After retaining the first $40 million of each loss
Our alternative reinsurance structure to protect against certain catastrophic events expired at the end of 2019 and was not renewed. That arrangement was collateralized reinsurance funded through the issuance of collateralized risk-linked securities, known as catastrophe bonds with Skyline Re Ltd.
Individual risks with insured values in excess of $100 million, as identified in the policy, are handled through a different reinsurance mechanism. We typically reinsure property coverage for individual risks with insured values between $100 million and $225 million under an automatic facultative agreement. For risks with property values exceeding $225 million, we negotiate the purchase of facultative coverage on an individual certificate basis. For casualty coverage on individual risks with limits exceeding $25 million, facultative reinsurance coverage is placed on an individual certificate basis. For risks with casualty limits that are between $25 million and $27 million, we sometimes forego facultative reinsurance and retain an additional $2 million of loss exposure.
The Cincinnati Specialty Underwriters Insurance Company has separate property and casualty reinsurance treaties for 2020 through its parent, The Cincinnati Insurance Company. Primary components of the treaties include:
Property per risk treaty - The property treaty provides limits up to $5 million, which is adequate capacity for the risk profile we insure. It also includes protection for extra-contractual liability coverage losses. Cincinnati Specialty Underwriters retains the first $1 million of any policy loss. Losses between $1 million and $5 million are reinsured at 100% by The Cincinnati Insurance Company.
Casualty treaties - The casualty treaty is written on an excess of loss basis and provide limits up to $6 million, which is adequate capacity for the risk profile we insure. A second treaty layer of $5 million excess of $6 million is written to provide coverage for extra contractual obligations or clash exposures. The maximum retention for any one casualty loss is $2 million by Cincinnati Specialty Underwriters. Losses between $2 million and $6 million are reinsured at 100% by The Cincinnati Insurance Company.
Basket retention - Cincinnati Specialty Underwriters has purchased this coverage to limit our retention to $2 million in the event that the same occurrence results in both a property and a casualty loss.
Cincinnati Life, our life insurance subsidiary, purchases reinsurance under separate treaties with many of the same reinsurers that write the property casualty working treaties. Our corporate retention is $1 million on a single life. For most of our core term life insurance line of business, we retain no more than a $500,000 exposure on a single policy, ceding the balance using excess over retention mortality coverage, and retaining the policy reserve. Because of the conservative nature of statutory reserving principles, retaining the policy reserve unduly depresses our statutory earnings and requires a large commitment of our capital. Effective November 1, 2015, we increased our retention to $1 million for issue ages up to 61 years on new term life insurance sales. For issue ages 61 years or older, our retention remains $500,000. For term life insurance business written prior to 2005, we retain 10% to 25% of each term policy, not to exceed $500,000, ceding the balance of mortality risk and policy reserve.
The following table shows our five largest life reinsurance receivable amounts by reinsurer at year-end 2019 and 2018. The A.M. Best insurer financial strength ratings are also shown.
Our inability to integrate Cincinnati Global and its subsidiaries into our on-going operations, or disruptions to our on-going operations due to such integration
Add assessments for guaranty funds, other insurance-related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes
Increase our provision for federal income taxes due to changes in tax law
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
The company’s independent registered public accounting firm has issued an audit report on our internal control over financial reporting as of December 31, 2019.
As described in Management’s Annual Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Cincinnati Global Underwriting Ltd., which was acquired on February 28, 2019, and whose financial statements constitute approximately 2% of both total assets and total revenue of the consolidated financial statement amounts as of and for the year ended December 31, 2019. Accordingly, our audit did not include the internal control over financial reporting at Cincinnati Global Underwriting, Ltd.
Property and Casualty Insurance Loss and Loss Expense Reserves - Refer to Note 4 to the financial statements.
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 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 estimate of loss and loss expense reserves is subject to review and adjustment by Company management.
Loss and loss expenses are inherently uncertain as to timing and amount and the recorded loss and loss expense reserves may vary materially from the actual ultimate cost of claims. Given the subjectivity in estimating ultimate loss and loss expenses, due to uncertainties concerning the future emergence of loss and loss expenses, inflation trends, and the judicial environment, among other factors, auditing loss and loss expense reserves involved an especially high degree of auditor judgment, including the need to involve our actuarial specialists.
We tested the 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.
We compared the Company’s prior year estimates of expected incurred losses to actual experience during the current year to identify potential bias in the determination of 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 was acquired effective February 28, 2019. Refer to Note 20, Acquisition, for additional information.
The Cincinnati Insurance Company leads our insurance group that also includes two subsidiaries: The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group markets a broad range of standard market commercial and personal policies. The group focuses on delivery of quality customer service to our select group of 1,796 independent insurance agencies with 2,458 reporting locations across 45 states. Other subsidiaries of The Cincinnati Insurance Company include: The Cincinnati Life Insurance Company, which markets life insurance and fixed annuities; and The Cincinnati Specialty Underwriters Insurance Company, which offers excess and surplus lines property casualty insurance products. The Cincinnati Insurance Company also conducts the business of our reinsurance assumed operations, Cincinnati ReSM.
Our consolidated financial statements include the accounts of the parent and its wholly owned subsidiaries and are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). The consolidated financial statements include Cincinnati Global's results for the period from February 28, 2019, through December 31, 2019. Foreign exchange rates related to Cincinnati Global's operations did not have a material impact to our consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.
We include the noncredit portion of fixed-maturity OTTI charges and unrealized gains and losses on fixed-maturity investments, net of taxes, in shareholders’ equity as accumulated other comprehensive income (AOCI). Investment gains and losses are recognized in net income based on the trade date accounting method.
Included within our other invested assets were $71 million and $60 million of private equity investments, $32 million and $33 million of life policy loans and $29 million and $30 million of real estate through direct property ownership and development projects in the United States at December 31, 2019 and 2018, respectively. Other invested assets also included $164 million held on deposit at Lloyd's at December 31, 2019. Life policy loans are carried at the receivable value. The private equity investments provide their financial statements to us and generally report investments on their balance sheets at fair value. We use the equity method of accounting for private equity and real estate development investments. Lloyd's deposits are held as cash and cash equivalents.
For the purpose of ASC 825 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, 2019, to account for nonperformance risk. See Note 3, Fair Value Measurements, for further details.
The consolidated property casualty companies actively write property casualty insurance through independent agencies in 45 states. Our 10 largest states generated 54.8% and 58.4% of total earned premiums in 2019 and 2018, respectively. Ohio, our largest state, accounted for 15.1% and 15.9% of total earned premiums in 2019 and 2018, respectively. Illinois, Georgia, North Carolina, Indiana and Pennsylvania each accounted for between 4% and 6% of total earned premiums in 2019. Our largest single agency relationship accounted for approximately 1.3% of our total property casualty earned premiums in 2019. No aggregate agency relationship locations under a single ownership structure accounted for more than 4% of our total property casualty earned premiums in 2019. We record revenues for installment charges as fee revenues in the consolidated statements of income.
Long-duration contracts are written to provide coverage for an extended period of time. Traditional long-duration contracts require policyholders to pay scheduled gross premiums, generally not less frequently than annually, over the term of the coverage. Premiums for these contracts, such as whole life insurance are recognized as revenue when due. Some traditional long-duration contracts, such as ten-pay whole life insurance, have premium payment periods shorter than the period over which coverage is provided. For these contracts, the excess of premium over the amount required to pay expenses and benefits is recognized over the term of the coverage rather than over the premium payment period.
We establish known loss reserves when reported. We establish reserves for losses in excess of reported activity in the form of IBNR. Reserves are established using actuarial analysis, which includes models and methods traditionally used for the types of exposures written. We establish reserves for event specific occurrences using modeling data and company specific data when available.
We record land at cost, and record building and equipment at cost less accumulated depreciation. Equipment held under finance leases also is classified as property and equipment with the related lease obligations recorded as liabilities. We capitalize and amortize costs for internally developed computer software during the application development stage. These costs generally consist of external consulting, internal payroll and payroll-related costs. Our depreciation is based on estimated useful lives (ranging from three to 39.5 years) using straight-line and accelerated methods. Depreciation expense was $25 million for 2019, $31 million for 2018 and $28 million for 2017. We review our accumulated depreciation for our building, equipment and software assets and write off fully depreciated assets for obsolesce and nonuse. We monitor land, building and equipment and software assets for potential impairments. Potential impairments may include a significant decrease in the fair values of the assets, considerable cost overruns on projects, a change in legal factors or business climate or other factors that indicate that the carrying amount may not be recoverable or useful. There were no recorded land, building and equipment impairments for 2019, 2018 or 2017.
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. Finance receivables are reviewed for impairment and are insignificant to our consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The main provision of ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 and ASU 2018-11, Targeted Improvements to Topic 842. ASU 2018-10 makes narrow-scope amendments to certain aspects of the new leasing standard while ASU 2018-11 provides relief from costs of implementing certain aspects of the new leasing standard.
The company adopted this ASU effective January 1, 2019, and it did not have a material impact on our company's consolidated financial position, cash flows or results of operations. The company has elected the practical expedient package for carrying forward historical lease classifications, not re-evaluating for embedded leases and not reassessing initial direct costs. The company also elected additional practical expedients to not recognize short-term leases on the balance sheet and to only combine lease and nonlease components for certain asset classes. We also elected not to restate prior periods. In support of our insurance operations, the company leases real estate properties which qualify as operating leases and also leases equipment and autos which qualify as finance leases.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718, Compensation - Stock Compensation, which currently only includes share-based payments issued to employees, to include share-based payments issued to nonemployees for the acquisition of goods and services. The company adopted this ASU effective January 1, 2019, and it did not have a material impact on our company's consolidated financial position, cash flows or results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. In addition, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, ASU 2019-04, Codification Improvements to Topic 326, ASU 2019-05, Targeted Transition Relief and ASU 2019-11, Codification Improvements to Topic 326. These ASU’s amend previous guidance on the impairment of financial instruments by adding an impairment model that allows an entity to recognize expected credit losses as an allowance rather than impairing as they are incurred. The new guidance is intended to reduce complexity of credit impairment models and result in a more timely recognition of expected credit losses. The guidance is effective for reporting periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained earnings. These ASU's have not yet been adopted; however, they will not have a material impact on our company's consolidated financial position, cash flows or results of operations.
In August 2018, the FASB issued ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits and modify the rate used to discount future cash flows. The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplify amortization of deferred acquisition costs while improving and expanding required disclosures. In November 2019, the FASB issued ASU 2019-09, Financial Services - Insurance (Topic 944): Effective Date. ASU 2019-09 delays the effective date of ASU 2018-12 by one year to interim and annual reporting periods beginning after December 15, 2021. These ASU's have not yet been adopted. Management is currently evaluating the impact on our company's consolidated financial position, cash flows and results of operations.
The net unrealized investment gains in our fixed-maturity portfolio at December 31, 2019, 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, 2019 and 2018.
We also held Level 1 cash and cash equivalents of $767 million and $784 million at December 31, 2019 and 2018, respectively. Level 3 assets reported at fair value in our consolidated financial statements are not material, and therefore no further disclosures are provided.
The following table shows fair values of our note payable and long-term debt:
Recorded reserves for the deferred annuities were $760 million and $787 million at December 31, 2019 and 2018, respectively. Recorded reserves for the structured settlements were $151 million and $156 million at December 31, 2019 and 2018, respectively.
Fair values for structured settlements were calculated based on internally developed models which assume the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2019 and 2018, to account for nonperformance risk. The structured settlements were classified as Level 2 as an active market does not exist, but fair value is based on observable inputs.
In 2019, 2018 and 2017, the reserve for loss and loss expense in the consolidated balance sheets also included $59 million, $61 million and $54 million, respectively, for certain life and health loss and loss expense reserves. Additional disclosures for reserves related to these health claims are not material and therefore not provided.
During 2019, we experienced $248 million of favorable development on prior accident years including $192 million of favorable development in commercial lines, $27 million of favorable development in personal lines and $11 million of favorable development in excess and surplus lines. Within commercial lines, we recognized favorable development of $78 million for the commercial casualty line, $77 million for the workers' compensation line, $25 million for the commercial property line and $6 million for the commercial auto line due to reduced uncertainty of prior accident year loss and loss expense for these lines. Within personal lines, we recognized favorable reserve development of $26 million in personal auto. We recognized unfavorable reserve development of $11 million for the homeowner line of business due primarily to higher-than-anticipated loss development on known claims.
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 adverse development in personal lines, $24 million of favorable development in excess and surplus lines and $1 million of adverse 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.
During 2017, we experienced $119 million of favorable development on prior accident years including $73 million of favorable development in commercial lines, $14 million of favorable development in personal lines, $29 million of favorable development in excess and surplus lines and $3 million of favorable development in our reinsurance assumed operations. We recognized favorable development of $54 million for the workers’ compensation line, $33 million for the commercial property line and $30 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss expense for these lines. We recognized unfavorable reserve development of $33 million for the commercial auto line due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled. Commercial casualty developed unfavorably by $11 million due to paid losses or re-estimates of case reserves at higher than expected levels.
The following table shows the commercial auto 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:
The following table shows the commercial property 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:
No premium deficiencies were recorded in the consolidated statements of income in 2019, 2018 and 2017, 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 $2.24, $2.12 and $2.50 for the years ended December 31, 2019, 2018 and 2017, respectively.
Our lead insurance subsidiary, The Cincinnati Insurance Company, paid dividends to the parent company of $625 million in 2019, $500 million in 2018 and $465 million in 2017. 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 2020, the total that our lead insurance subsidiary may pay in dividends is approximately $562 million.
Dividend payments from Cincinnati Global to the parent company are subject to regulation by UK law. Cincinnati Global paid no dividends to the parent company in 2019.
The table below shows beginning and end of year accumulated other comprehensive income (AOCI) for investments, pension obligations, life deferred acquisition costs, life policy reserves and other. The changes from the beginning of year to the end of year are the result of changes to other comprehensive income or loss (OCI).
The differences between the 21% and 35% statutory federal income tax rate and our effective income tax rate were as follows:
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted and represented one of the most comprehensive changes in U.S. corporate income taxation since 1986. The Tax Act revised the U.S. corporate income tax by lowering the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%. In addition to lowering tax rates, changes were made to the amount of the dividends received deduction and the required proration addback for qualified dividend income and tax exempt municipal interest. The Tax Act was effective January 1, 2018. The reduction in corporate income tax rate decreased our net deferred tax liability as of December 22, 2017, by $495 million. The effect of the rate change was recorded as a one-time noncash benefit to income tax expense in our consolidated statements of income for the year ended December 31, 2017. This benefit results from re-measuring our net deferred tax liability at the newly enacted corporate income tax rate of 21% (the rate at which the deferred items are expected to be reversed) versus the 35% rate at which the net deferred tax benefits were previously carried. Of this $495 million benefit, $492 million relates to net unrealized gains on investments and other AOCI amounts. The remainder relates to differences in the recognition of deferred acquisition costs, unearned premiums, insurance reserves and basis differences in the carrying value of investments held.
The provision for federal income taxes is based upon the filing of a consolidated income tax return for the company and its domestic subsidiaries within the United States. As of December 31, 2019, 2018 and 2017, we have no operating loss carryforwards in the United States. The life group operating loss carryforward from our 2017 tax year was fully utilized in our 2018 tax year resulting in a tax benefit of less than one million. For the years ended December 31, 2019, 2018 and 2017, we have no capital loss carryforwards in the United States. As more fully discussed below, Cincinnati Global which we acquired in 2019, has operating loss carryforwards in the United Kingdom.
The unrecognized tax benefit liability is carried in other liabilities in the consolidated balance sheets. Included in the unrecognized tax benefit liability as of December 31, 2019 is $34 million, if recognized, would affect the effective tax rate. Although no interest and penalties currently are accrued, if incurred, they would be recognized as a component of income tax expense. We do not expect any changes to our unrecognized tax benefit liability in the next twelve months.
Income taxes paid in our consolidated statements of cash flows are shown net of refunds received. We received refunds of $94 million in 2019, none in 2018 and $18 million in 2017.
As of December 31, 2019, Cincinnati Global had $41 million of net deferred tax assets with an offsetting valuation allowance of $41 million.
Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred tax assets will not be realized. After considering all positive and negative evidence related to the Cincinnati Global operations, we believe it was appropriate to set up a valuation allowance for purposes of our opening Cincinnati Global balance sheet and is appropriate to carry a valuation allowance as of December 31, 2019.
We sponsor a defined contribution plan (401(k) plan) for eligible associates with matching company contributions totaling $19 million, $18 million and $16 million during the years 2019, 2018 and 2017, respectively. Associates who are not accruing benefits under the pension plan are eligible to receive the company match of up to 6% of cash compensation. Participants vest in the company match for the 401(k) plan after three years of eligible service.
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 0.94 percentage points for the qualified pension plan and by 0.92 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, but at year-end 2019 the base table was also changed to reflect the Pri-2012 tables released in 2019. The RP-2014 table projected generationally with Scale MP-2018 and Scale MP-2017 were used for the years 2018 and 2017, respectively. 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.
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, 2019 and 2018. There have been no transfers between Level 1 and Level 2 for the years ended December 31, 2019 and 2018. The following table shows the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2019 and 2018. Excluded from the table below is cash on hand of $17 million and $32 million at December 31, 2019 and 2018, respectively.
Share-based compensation cost after tax was $24 million, $23 million and $17 million for the years ended
$5 million, and $9 million for the years ended December 31, 2019, 2018 and 2017, respectively. Options exercised during the years ended December 31, 2019, 2018 and 2017, had intrinsic value of $26 million, $15 million and $19 million, respectively. Intrinsic value is the market price less the exercise price. Options vested during the years ended December 31, 2019, 2018 and 2017, had total intrinsic value of $23 million, $6 million and $8 million, respectively.
Cash received from the exercise of options was $11 million, $9 million and $13 million for the years ended December 31, 2019, 2018 and 2017, respectively. We acquired 103,237, 69,649 and 96,030 shares totaling
Under all active shareholder approved plans, a total of 17.3 million shares were authorized to be granted. At December 31, 2019, 8.2 million shares remained available for future issuance under the plans. During 2019, we granted 15,102 shares of common stock to our directors for 2018 board service fees.
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 2019, 2018 and 2017. 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.
These performance-based awards are valued using a Monte-Carlo valuation on the date of grant, which uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each peer and the pairwise correlations of each peer being modeled. Compensation cost is recognized regardless of whether the market-based performance objective has been satisfied. We make assumptions to develop the Monte-Carlo model as follows:
Below is a summary of service-based and performance-based share information, assuming a target payout for performance-based shares, for the year 2019:
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.
Identifiable assets are used by each segment in its operations. We do not separately report the identifiable assets for the commercial, personal or excess and surplus lines segments because we do not use that measure to analyze the segments. We include all investment assets, regardless of ownership, in the investments segment.
On February 28, 2019 (closing date or acquisition date), pursuant to the agreement (the SPA) for the sale and purchase of the entire issued share capital of MSP Underwriting Limited (MSP), dated October 11, 2018, by and between the company and Münchener Rückversicherungs Gesellschaft AG (Munich Re), the company acquired from Munich Re all of the issued and outstanding share capital of MSP and its subsidiaries, including the Lloyd's managing agent, Beaufort Underwriting Agency Limited for Syndicate 318 (the acquisition). MSP was rebranded as Cincinnati Global effective May 1, 2019, reflecting its new identity as a subsidiary of the company. The acquisition of Cincinnati Global reflects progress toward our long-term objective of diversifying revenue and profitability by expanding our operations geographically and by line of business.
In connection with the acquisition, the company incurred immaterial transaction related expenses.