Cincinnati Financial(CINF) - 2023 Q4 - Annual Report

Part I Business Cincinnati Financial is an Ohio-based holding company primarily engaged in property casualty insurance through independent agencies - The company's lead subsidiary, The Cincinnati Insurance Company, was founded in 1950, and its main business is property casualty insurance marketed through independent insurance agencies in 46 states[12] - The company's strategy is built on three competitive advantages: commitment to independent agencies, financial strength, and a local decision-making structure[19] - Key strategic initiatives are grouped into two areas: managing insurance profitability through enhanced underwriting and efficiency, and driving premium growth by penetrating markets and expanding operations like Cincinnati Re and Cincinnati Global[20] Our Business and Our Strategy The company's strategy emphasizes independent agency relationships, strong financial ratings, and a decentralized operating structure Agency Data (as of Dec 31) | Agency Data | 2023 | 2022 | | :--- | :--- | :--- | | Property casualty agency relationships | 2,080 | 1,984 | | Property casualty reporting locations | 3,116 | 2,861 | | New relationship appointments | 206 | 146 | | Active states | 46 | 46 | - The company maintains a strong capital position with a debt-to-total-capital ratio of 6.3% at year-end 2023. Long-term debt was $790 million[47] Insurer Financial Strength Ratings | Rating Agency | Standard Market P&C | Life Insurance | E&S Insurance | Outlook | | :--- | :--- | :--- | :--- | :--- | | A.M. Best | A+ (Superior) | A+ (Superior) | A+ (Superior) | Stable | | Fitch Ratings | A+ (Strong) | A+ (Strong) | - | Stable | | Moody's | A1 (Good) | - | - | Stable | | S&P Global | A+ (Strong) | A+ (Strong) | - | Stable | - As of the end of 2023, the company employed 5,426 associates, with a low voluntary turnover rate of 6%[170] Our Segments The company operates five segments: Commercial, Personal, E&S, Life, and Investments, with Commercial Lines as the largest premium contributor Net Written Premiums by Segment (in millions) | Segment | 2023 | 2022 | 2021 | % of Total 2023 | | :--- | :--- | :--- | :--- | :--- | | Commercial lines insurance | $4,336 | $4,159 | $3,811 | 51.5% | | Personal lines insurance | $2,302 | $1,831 | $1,594 | 27.4% | | Excess and surplus lines insurance | $570 | $502 | $426 | 6.8% | | Life insurance | $364 | $339 | $346 | 4.3% | | Other (Cincinnati Re & Global) | $838 | $815 | $648 | 10.0% | | Total net written premiums | $8,410 | $7,646 | $6,825 | 100.0% | Other The 'Other' segment includes Cincinnati Re, Cincinnati Global, and CFC Investment Company, detailing their respective premiums and receivables - Cincinnati Re's net written premiums totaled $558 million in 2023, down from $585 million in 2022. The portfolio consists of property (32%), casualty (48%), and specialty (20%) exposures[90] - Cincinnati Global's net written premiums grew to $280 million in 2023 from $230 million in 2022. The majority of premiums were for U.S. and international property exposures[164] - CFC Investment Company, the commercial leasing and financing subsidiary, had receivables of $108 million at year-end 2023, up from $92 million at year-end 2022[75] Regulation The company's U.S. insurance operations are state-regulated, subject to holding company rules and federal laws, with foreign operations under U.K. regulations - The company is regulated as an insurance holding company system, requiring annual financial disclosures and oversight of transactions between subsidiaries[83] - Federal legislation affecting the company includes privacy laws (Gramm-Leach-Bliley Act), the Terrorism Risk Insurance Act (TRIA), and anti-money laundering statutes[84] - Foreign operations in the U.K. are regulated by The Prudential Regulation Authority (PRA) and The Financial Conduct Authority (FCA), and are subject to Solvency II capital and risk management requirements[152][166] Risk Factors The company faces risks from agent reliance, catastrophes, competition, reserve estimation, market volatility, inflation, and regulatory changes Risks related to insurance operations Insurance operations face risks from agent reliance, catastrophe losses, reserve estimation uncertainty, and international regulatory exposures - The company's reliance on independent, non-exclusive agents means it must maintain strong relationships and offer competitive products to prevent agents from favoring competitors[102] - The company is exposed to significant catastrophe risk. Probable maximum loss estimates for a single hurricane event, net of reinsurance and taxes, are $570 million for a 1-in-100-year event and $848 million for a 1-in-250-year event[107] - Loss reserves, the company's largest liability, are based on estimates and are inherently uncertain. Inadequacies could arise from unforeseen trends, inflation, or changes in the legal environment, potentially impacting earnings[143][144] - International operations through Cincinnati Global expose the company to additional regulations, including the U.K.'s Solvency II regime, and risks such as currency fluctuations and political instability[149] Risks related to investments or other financial matters Investment and financial risks include market volatility, interest rate sensitivity, and holding company dividend dependency - Financial market volatility and economic downturns could adversely affect the company's investment portfolio, which is a key component of its book value and net income[452][453] - Rising interest rates have an adverse effect on shareholders' equity due to the falling value of the company's fixed-maturity portfolio, which made up 55.7% of total investments at year-end 2023[454] - As a holding company, Cincinnati Financial's cash flow for paying dividends and debt service is dependent on dividends from its operating subsidiaries, which are subject to regulatory restrictions[459][478] General risk factors General risks include inflation, technology failures, cyberattacks, evolving regulations (ESG, AI), and data security breaches - Elevated inflation negatively impacts underwriting profits by increasing the cost of claims for auto and property repairs, and also reduces the fair value of the company's investment portfolio[460][479] - The business is dependent on its technology systems. Failures, outages, or security breaches could compromise its ability to conduct business, serve customers, and pay claims[461][511] - Changes in laws and regulations, including new rules on the use of AI, ESG standards, and tax laws, could adversely affect the company's business by increasing costs or restricting its ability to price risks adequately[463][464][481] - A breach of data security could expose the company to litigation, fines, and reputational damage, as it is subject to numerous evolving federal, state, and international privacy laws[513] Cybersecurity Cybersecurity is managed within the enterprise risk program, overseen by the audit committee, with the CISO leading efforts - Cybersecurity is managed within the overall enterprise risk program, with oversight from the board of directors' audit committee, which receives quarterly reports on risks and controls[488][490] - The Chief Information Security Officer, with over 25 years of experience, leads the cybersecurity efforts in collaboration with the Chief Information Officer and Chief Risk Officer[516] - The company's incident response process is modeled after NIST frameworks. Incidents are evaluated, documented, and shared with the audit committee, which received four updates on cybersecurity matters in 2023[493][518] Properties The company owns its headquarters and a subsidiary building, and leases additional office spaces in the U.S. and London - The company owns its headquarters building in Fairfield, Ohio, with 1,508,200 square feet of space, recorded at a value of $133 million as of December 31, 2023[494] - The company leases office space in London, U.K., for its Cincinnati Global operations and also leases various office spaces across the U.S.[520] Legal Proceedings The company and its subsidiaries are not involved in any material litigation beyond routine insurance-related cases - The company states that it is not involved in any material litigation outside of the ordinary course of business[521] Part II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CINF stock underperformed benchmarks over five years, with the company repurchasing shares under an authorized program - The five-year total return for CINF stock was 52.2%, compared to 107.2% for the S&P 500 Index and 99.6% for the S&P Composite 1500 Property & Casualty Insurance Index[498] - During 2023, the company repurchased 600,000 shares at an average price of $110.99 per share[527] - As of December 31, 2023, 6,726,785 shares remained available for repurchase under the company's authorized programs[527] Management's Discussion and Analysis of Financial Condition and Results of Operations MD&A covers financial condition, operational results, VCR performance, segment analysis, critical estimates, and capital resources Executive Summary The Executive Summary highlights the improved VCR driven by investments and outlines key long-term objectives Value Creation Ratio (VCR) Performance | Period | 2023 | 3-Year Avg. | 5-Year Avg. | | :--- | :--- | :--- | :--- | | VCR | 19.5% | 10.2% | 15.2% | - The 2023 VCR improved by 34.1 percentage points from 2022, mainly due to a 17.9 point contribution from equity securities and a 12.0 point contribution from fixed-maturity securities[533][562] - The company's five-year compound annual growth rate for net written premiums was 9.9%, exceeding the industry average of 6.9%[536] - The company has increased its annual cash dividend for 63 consecutive years through 2023[567] Critical Accounting Estimates Critical accounting estimates include property casualty loss reserves, life policy reserves, and fair value measurements - Property casualty loss and loss expense reserves are the company's most significant accounting estimate, with gross reserves totaling $8.975 billion at year-end 2023[578] - The company established a reasonably likely range for net loss and loss expense reserves of $7.926 billion to $8.704 billion at year-end 2023, carrying net reserves of $8.613 billion within that range[333] - Life policy reserves for term and whole life are sensitive to market value discount rates; a 100 basis point decrease would increase reserves and decrease AOCI by $200 million[620] - The company uses a three-level hierarchy for fair value measurements, with substantially all of its $24.780 billion investment portfolio classified as Level 1 or Level 2, indicating reliance on observable market data[600] Financial Results This section details consolidated and segment financial performance, highlighting premium growth, improved combined ratio, and investment gains Consolidated Property Casualty Insurance Highlights (in millions) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Written Premiums | $8,046 | $7,307 | $6,479 | | Underwriting Profit | $401 | $140 | $731 | | GAAP Combined Ratio | 94.9% | 98.1% | 88.3% | Income (Loss) Before Income Taxes by Segment (in millions) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Commercial lines insurance | $168 | $38 | $598 | | Personal lines insurance | ($4) | $18 | $97 | | Excess and surplus lines insurance | $54 | $48 | $44 | | Life insurance | $41 | $27 | $12 | | Investments | $1,900 | ($795) | $3,018 | | Other | $117 | ($30) | ($71) | Liquidity and Capital Resources The company maintains strong liquidity and capital, supported by operating cash flow and extensive reinsurance programs - At year-end 2023, the parent company had $4.858 billion in cash and marketable securities. Its primary sources of cash are dividends from subsidiaries and investment income[295] - The insurance subsidiaries generated $1.831 billion in cash flow from operations in 2023, driven by premium collections exceeding claim payments and expenses[307] - Total capital stood at $12.913 billion at year-end 2023, with shareholders' equity of $12.098 billion and a debt-to-total-capital ratio of 6.3%[326] - For 2024, the company purchased a property catastrophe reinsurance treaty with a limit up to $1.2 billion, retaining the first $200 million of any loss[382] Quantitative and Qualitative Disclosures About Market Risk The company's market risk stems from interest rate and equity price fluctuations, impacting its investment portfolios - The company's fixed-maturity portfolio had an effective duration of 4.3 years at year-end 2023. A 100-basis-point change in interest rates would result in an approximate 4.3% change in the portfolio's fair value[419] Interest Rate Sensitivity on Fixed-Maturity Portfolio (Fair Value in millions) | Interest Rate Change | -200 bps | -100 bps | No Change | +100 bps | +200 bps | | :--- | :--- | :--- | :--- | :--- | :--- | | At Dec 31, 2023 | $14,962 | $14,375 | $13,791 | $13,179 | $12,543 | Equity Price Sensitivity on Equity Portfolio (Fair Value in millions) | Market Price Change | -20% | -10% | No Change | +10% | +20% | | :--- | :--- | :--- | :--- | :--- | :--- | | At Dec 31, 2023 | $8,791 | $9,890 | $10,989 | $12,088 | $13,187 | Financial Statements and Supplementary Data This section presents the company's consolidated GAAP financial statements, including balance sheets, income, and cash flows Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Investments | $25,357 | $22,425 | | Total Assets | $32,769 | $29,732 | | Total Liabilities | $20,671 | $19,170 | | Total Shareholders' Equity | $12,098 | $10,562 | Consolidated Income Statement Highlights (in millions) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Revenues | $10,013 | $6,563 | $9,626 | | Total Benefits and Expenses | $7,737 | $7,257 | $5,928 | | Net Income (Loss) | $1,843 | ($487) | $2,968 | Consolidated Cash Flow Highlights (in millions) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $2,052 | $2,052 | $1,981 | | Net cash used in investing activities | ($1,608) | ($933) | ($1,057) | | Net cash used in financing activities | ($801) | ($994) | ($685) | Part III Directors, Executive Officers and Corporate Governance This section incorporates information on directors, executive officers, and corporate governance from the 2024 Proxy Statement - Information regarding directors, corporate governance, and delinquent Section 16(a) reports is incorporated by reference from the company's 2024 Proxy Statement[1025] Executive Compensation This section incorporates executive compensation details, including the Compensation Discussion and Analysis, from the 2024 Proxy Statement - Details on executive compensation are incorporated by reference from the company's 2024 Proxy Statement[1028] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates security ownership information for beneficial owners and management from the 2024 Proxy Statement - Information on security ownership by principal shareholders and management is incorporated by reference from the 2024 Proxy Statement[1043] Certain Relationships and Related Transactions, and Director Independence This section incorporates information on related party transactions and director independence from the 2024 Proxy Statement - Details on related transactions and director independence are incorporated by reference from the 2024 Proxy Statement[1044] Principal Accounting Fees and Services This section incorporates details on principal accounting fees and services from the 'Audit-Related Matters' section of the 2024 Proxy Statement - Information regarding fees paid to the principal accountant is incorporated by reference from the 2024 Proxy Statement[1134] Part IV Exhibit and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including supplementary schedules for investments, insurance information, and reinsurance[1153]