CINCINNATI FINANCIAL CORP (CINF) FY 2022 MD&A

ITEM 7.    Management's Discussion and Analysis of Financial Condition and

Results of Operations

Introduction

The purpose of Management’s Discussion and Analysis is to provide an understanding of Cincinnati Financial Corporation’s consolidated results of operations and financial condition. Our Management’s Discussion and Analysis should be read in conjunction with Item 8, Consolidated Financial Statements and related Notes. We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and stock dividends.

We begin with an executive summary of our results of operations, followed by other highlights and details about critical accounting estimates. In several instances, we refer to estimated industry data so that we can provide information on our performance within the context of the overall insurance industry. Unless otherwise noted, the industry data is prepared by A.M. Best, a leading insurance industry statistical, analytical and financial strength rating organization. Information from A.M. Best is presented on a statutory accounting basis for insurance company regulation in the United States of America. When we provide our results on a comparable statutory accounting basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).

Through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on net written premium volume for the first nine months of 2022, among approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies in 46 states as discussed in Item 1, Our Business and Our Strategy.

The U.S. economy, the insurance industry and our company continue to face many challenges. Our long-term perspective has allowed us to address immediate challenges while also focusing on the major decisions that best position the company for success through all market cycles. We believe that this forward-looking view consistently benefits our shareholders, agents, policyholders and associates.

To measure our progress, we have defined a measure of value creation that we believe captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. We refer to this measure as our value creation ratio (VCR) and it is made up of two primary components: (1) our rate of growth in book value per share plus (2) the ratio of dividends declared per share to beginning book value per share. This measure, intended to be all-inclusive regarding changes in book value per share, uses originally reported book value per share in cases where book value per share has been adjusted, such as after the adoption of Accounting Standards Updates with a cumulative effect of a change in accounting.

The primary sources of our company’s net income are summarized below. We discuss contributions to net income and VCR by source in Corporate Financial Highlights, followed by more detailed discussion in Financial Results.

•Underwriting profit (loss) – Includes revenues from earned premiums for insurance and reinsurance policies or contracts, reduced by losses and loss expenses from associated insurance coverages. Those revenues are further reduced by underwriting expenses associated with marketing policies or related to administration of our insurance operations. The net result represents an underwriting profit when revenues exceed losses and expenses.

•Investment income – Is generated primarily from investing the premiums collected for insurance policies sold, until funds are needed to pay losses for insurance claims or other expenses. Interest income from bonds or dividend income from stocks are the main categories of our investment income, with additional contribution from compounding effects over time.

•Investment gains and losses – Occur from appreciation or depreciation of invested assets over time. Gains or losses are generally recognized from changes in market values of equity securities without a sale or when invested assets are sold or become impaired.

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Executive Summary

Our value creation ratio, defined above, is our primary performance target. VCR trends are shown in the table below.

We are targeting an annual value creation ratio averaging 10% to 13% over the next five-year period. At negative 14.6% for 2022, our performance was significantly below the low end of that range. It was within the range for the five-year period, but below the range for the three-year period, both that ended in December 2022.

The table below shows the primary components of our value creation ratio on a percentage basis. Analysis of the components aids understanding of our financial performance. Our financial results are further analyzed in the Corporate Financial Highlights section below.

The 2022 value creation ratio decreased by 40.3 percentage points, compared with 2021, and again included a significant contribution from operating results, as shown in the table above. The 2022 ratio decrease was primarily due to a reduction in overall net gains from our investment portfolio, with reductions of 26.1 percentage-points from our equity securities investment portfolio and 8.6 points from our fixed-maturity securities investment portfolio. The increase in 2021, compared with 2020, included improved operating results and a higher valuation for our investment portfolio.

We believe our value creation ratio is a useful measure. The table below shows calculations for VCR.

* Book value per share is calculated by dividing end of period total shareholders' equity by end of period shares outstanding

** Change in book value divided by the beginning of year book value

*** Dividend declared to shareholders divided by beginning of year book value

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When looking at our longer-term objectives, we see three primary performance drivers for our value creation ratio:

•Premium growth – We believe over any five-year period our agency relationships and initiatives can lead to a property casualty written premium growth rate that exceeds the industry average. The compound annual growth rate of our net written premiums was 8.6% over the five-year period 2018 through 2022, exceeding the 7.3% estimated growth rate for the property casualty insurance industry, with 2022 representing industry data reported through the first nine months of 2022. The industry’s growth rate excludes its mortgage and financial guaranty lines of business.

•Combined ratio – We believe our underwriting philosophy and initiatives can drive performance to achieve our underwriting profitability target of a GAAP combined ratio over any five-year period that consistently averages within the range of 95% to 100%. Our GAAP combined ratio averaged 94.9% over the five-year period 2018 through 2022, slightly better than the performance target range. Performance as measured by the combined ratio is discussed in Consolidated Property Casualty Insurance Results. Our statutory combined ratio averaged 94.3% over the five-year period 2018 through 2022, compared with an estimated 99.7% for the property casualty industry, with 2022 representing industry data reported through the first nine months of 2022. The industry’s ratio again excludes its mortgage and financial guaranty lines of business.

•Investment contribution – We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year total return of the S&P 500 Index.

◦Investment income growth, on a pretax basis, had a compound annual growth rate of 5.1% over the five-year period 2018 through 2022.

◦Over the five years ended December 31, 2022, our equity portfolio compound annual total return was 11.1% compared with a compound annual total return of 9.4% for the Index. Our equity portfolio favors larger-capitalization, high-quality, dividend-growing stocks with a slight value orientation. For the year 2022, our equity portfolio total return was negative 10.9%, compared with negative 18.1% for the Index.

The board of directors is committed to rewarding shareholders directly through cash dividends and share repurchase authorizations. Through 2022, the company has increased the annual cash dividend rate for 62 consecutive years, a record we believe is matched by only seven other publicly traded U.S. companies. In addition to regular dividends, strong capital and excellent company performance has provided opportunities to further reward shareholders. The board regularly evaluates relevant factors in dividend-related decisions, and the 2022 increase to the regular dividend reflected confidence in our outstanding capital, liquidity and financial flexibility, as well as progress of our initiatives to improve earnings performance while growing insurance premium revenues. We discuss our financial position in more detail in Liquidity and Capital Resources.

Our view of the shareholder value we can create over the next five years relies largely on three assumptions – each highly dependent on the external environment. First, we anticipate our property casualty average insurance prices will increase in proportion to, or in excess of, our loss cost trends. Second, we assume that the economy can maintain a long-term growth track. Third, we assume that valuations of our marketable securities will vary within a typical range over time, based on historical trends. If those assumptions prove to be inaccurate, we may not be able to achieve our performance targets even if we accomplish our strategic objectives.

We discuss in Item 1A, Risk Factors, many potential risks to our business and our ability to achieve our qualitative and quantitative objectives.

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Corporate Financial Highlights

In addition to the value creation ratio discussion and analysis in the Executive Summary, we further analyze our financial results in the sections below.

Balance Sheet Data

Total investments decreased by 9% during 2022 on a fair value basis, and included a decrease in our securities portfolio valuation that offset a 6% increase in its cost basis. Entering 2023, we believe the portfolio continues to be well diversified and is well positioned to withstand short-term fluctuations. We discuss our investment strategy in Item 1, Investments Segment, and results for the segment in Investments Results. Total assets decreased by 5%, compared with year-end 2021. Shareholders’ equity decreased by 20% and book value per share decreased by 18%, for reasons discussed in the preceding Executive Summary.

The amount of our debt obligations decreased by $4 million in 2022, compared with 2021. Our 7.4% ratio of debt to total capital (debt plus shareholders’ equity) at year-end 2022 increased by 1.4 percentage points compared with the prior-year ratio.

Income Statement and Per Share Data

A net loss of $486 million in 2022 represented a decrease of $3.432 billion, compared with net income for 2021, including a $3.062 billion reduction in net investment gains on an after-tax basis. The reduced 2022 net income also included a decrease in property casualty underwriting income of $467 million after taxes, as discussed below, and a $55 million increase in investment income after taxes. Our investment operation’s performance is discussed further in Investments Results. Net income in 2021 increased by $1.730 billion, compared with 2020, including a $1.220 billion increase for 2021 net investment gains after taxes. The increase in 2021 net income also included an increase in property casualty underwriting income of $483 million after taxes and a $37 million increase in investment income after taxes.

During 2022, SARS-CoV-2, also known as COVID-19 and recognized as a pandemic by the World Health Organization, continued to cause various effects in parts of the world. We believe it did not have a significant effect on our premium revenues during 2022 and there were no material changes to our estimates for incurred losses and expenses related to the pandemic. In 2021, it caused dampening economic effects in some areas where we

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operate, while many areas experienced strengthening economic effects due to increased business activity and consumer spending. In 2020, it caused significant effects, including temporary closures of many businesses and reduced consumer spending due to shelter-in-place, stay-at-home and other governmental actions. Those orders and the uncertainty surrounding COVID-19 had broad financial market effects and caused significant market disruption and volatility, including to our investment portfolio during 2020.

As the pandemic unfolded in 2020 and continued into 2021, management met with the board of directors frequently to discuss matters such as our response to prioritize the health and safety of our associates, agents and policyholders. Discussion also included near-term and longer-term financial effects. As stay-at-home orders were enacted, we promptly and effectively transitioned most of our headquarters associates to working from home. We provided the technology necessary to keep the business running, as associates continued writing and collecting insurance premiums, responding to claims and performing other operational functions. They joined our field associates who already worked from home, providing agents and policyholders with outstanding service. At the end of 2021, most of our associates continued to work from home. During the first half of 2022, most of our headquarters associates transitioned to a hybrid work schedule, regularly alternating between work at our headquarters and work from remote locations.

While we believe the COVID-19 pandemic did not have a significant effect on our premium revenues for the last three quarters of 2021, in 2020 and early 2021 it slowed the growth of our premium revenues, including new business written premiums. Premium growth by segment is discussed below in Financial Results. For future periods, renewal premium or new business premium amounts could decline if the basis for policy premiums, such as sales and payrolls of businesses we insure, decrease as a result of the pandemic and a weakening economy. We are not able to determine premium effects for future periods.

During 2021, changes to our estimates for incurred losses and expenses related to the pandemic included a $2 million increase in Cincinnati Re® losses, a $1 million decrease in Cincinnati Global Underwriting Ltd.SM (Cincinnati Global) losses and an $8 million decrease in ultimate credit losses related to uncollectible premiums. For full-year 2020, pandemic-related incurred losses and expenses totaled $85 million. The total included $30 million for legal expenses in defense of business interruption claims, $19 million for Cincinnati Re losses, $12 million for Cincinnati Global losses, $8 million for credit losses related to uncollectible premiums and $16 million for the Stay-at-Home policyholder credit for personal auto policies.

Factors used in estimating reserves for business interruption legal expenses included estimates for attorney fees associated with the defense of such lawsuits filed against the company; litigation trends of such cases, including responding to amended and replead cases and cases on appeal; and trends in judicial decisions in cases filed against the company and other insurers.

Approximately half of the losses for Cincinnati Re represent its estimated share from reinsurance treaties with companies that provided affirmative coverage for pandemic-related business interruption, and most of the remainder is an estimated share of treaties covering professional liability. Most of the losses for Cincinnati Global represent its share of potential losses from business interruption coverage for large risks with customized policy terms and conditions.

Most of our commercial property policies are written to preclude coverage for business interruption claims unless there is direct physical loss or damage to property. For this reason, most of our standard market commercial property policies in states where we actively write business do not contain a specific virus exclusion.

Loss experience for our insurance operations is influenced by many factors, as discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves. Because of various factors that affect exposure to certain insurance losses, such as less miles driven for vehicles or reduced sales and payrolls for businesses, there could be a reduction in future losses, and in some cases a generally corresponding reduction in premiums. Also, there could be losses or legal expenses that increase or otherwise occur independently of changes in sales or payrolls of businesses we insure, due to pandemic effects or other factors. We are not able to determine loss effects for future periods.

As discussed in Investments Results, we reported a net investment loss in 2022, primarily due to a $1.526 billion net unfavorable change in fair value for equity securities still held. In both 2021 and 2020, we reported net investment gains, including $2.278 billion in 2021 and $841 million in 2020 from net favorable changes in fair value for equity securities still held.

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Contribution from Insurance Operations

Property casualty net written premiums grew 13% and earned premiums grew 12% in 2022. The growth reflected average renewal price increases, premium growth initiatives and a higher level of insured exposures, including a contribution to net written premium growth of 3 percentage points from Cincinnati Re and Cincinnati Global in total. The 2021 growth rate for net written premiums was slower, but was driven by factors similar to 2022. Trends and related factors are discussed in Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance Results.

Our property casualty insurance operations generated an underwriting profit for each of the three years ending in 2022. The $591 million decrease in 2022, compared with excellent results in 2021, included higher current accident year loss and loss expenses before catastrophe losses, reflecting increased uncertainty of estimated ultimate losses, due in part to elevated paid losses reflecting economic or other forms of inflation. The 2022 decrease also included a $135 million increase in losses from natural catastrophe events and $276 million less benefit from net favorable reserve development on prior accident years before catastrophe losses. The $612 million increase in 2021, compared with 2020, included a $195 million decrease in losses from catastrophe events and $265 million more benefit from net favorable reserve development on prior accident years before catastrophe losses.

We measure property casualty underwriting profitability primarily by the combined ratio. Our combined ratio measures the percentage of each earned premium dollar spent on claims plus all expenses related to our property casualty operations, all on a pretax basis. A lower ratio indicates more favorable results and better underlying performance. A ratio below 100% represents an underwriting profit. Initiatives to improve our combined ratio are discussed in Item 1, Our Business and Our Strategy, Strategic Initiatives. In 2022, 2021 and 2020, favorable development on reserves for claims that occurred in prior accident years helped offset other incurred losses and loss expenses. Reserve development is discussed further in Property Casualty Loss and Loss Expense Obligations and Reserves. Losses from weather-related catastrophes are another important item influencing the combined ratio and are discussed along with other factors in Financial Results for our property casualty business and related segments.

Our life insurance segment reported a gain of $28 million in 2022 and a loss of $16 million in 2021. We discuss results for the segment in Life Insurance Results. Most of this segment’s investment income is included in our investments segment results. In addition to investment income, investment gains from the life insurance investment portfolio are also included in our investments segment results.

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Critical Accounting Estimates

Cincinnati Financial Corporation’s financial statements are prepared using U.S. GAAP. These principles require management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates.

The significant accounting policies used in the preparation of the financial statements are discussed in Item 8, Note 1 of the Consolidated Financial Statements. In conjunction with that discussion, material implications of uncertainties associated with the methods, assumptions and estimates underlying the company’s critical accounting policies are discussed below. The audit committee of the board of directors reviews the annual financial statements with management and the independent registered public accounting firm. These discussions cover the quality of earnings, review of reserves and accruals, reconsideration of the suitability of accounting principles, review of highly judgmental areas including critical accounting estimates, audit adjustments and such other inquiries as may be appropriate.

Property Casualty Insurance Loss and Loss Expense Reserves

We establish loss and loss expense reserves for our property casualty insurance business as balance sheet liabilities. Unpaid loss and loss expenses are the estimated amounts necessary to pay for and settle all outstanding insured claims, including incurred but not reported (IBNR) claims. These reserves account for unpaid loss and loss expenses as of a financial statement date.

For some lines of business that we write, a considerable and uncertain amount of time can elapse between the occurrence, reporting and payment of insured claims. The amount we will actually have to pay for such claims also can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. Gross loss and loss expense reserves were $8.336 billion at year-end 2022 compared with $7.229 billion at year-end 2021.

How Reserves Are Established

Our field claims representatives establish case reserves when claims are reported to the company to provide for our unpaid loss and loss expense obligation associated with known claims. Field claims managers supervise and review all claims with case reserves less than $100,000. Additionally, a headquarters supervisor and regional claims manager review claims under $100,000 if litigation or a certain specialty claim is involved. All claims with case reserves of $100,000 or greater are reviewed and approved by experienced headquarters supervisors and regional claims managers. Upper-level headquarters claims managers also review case reserves of $175,000 or more.

Our claims representatives base their case reserve estimates primarily upon case-by-case evaluations that consider:

•type of claim involved

•circumstances surrounding each claim

•policy provisions pertaining to each claim

•potential for subrogation or salvage recoverable

•general insurance reserving practices

Case reserves of all sizes are subject to review on a 90-day cycle, or more frequently if new information about a loss becomes available. As part of the review process, we monitor industry trends, cost trends, relevant court cases, legislative activity and other current events in an effort to ascertain new or additional loss exposures.

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We also establish IBNR reserves to provide for all unpaid loss and loss expenses not accounted for by case reserves:

•For events designated as natural catastrophes resulting in losses incurred related to premiums written on a direct basis by The Cincinnati Insurance Companies, we calculate IBNR reserves directly as a result of an estimated IBNR claim count and an estimated average claim amount for each event. Once case reserves are established for a catastrophe event, we reduce the IBNR reserves. Our claims department management coordinates the assessment of these events and prepares the related IBNR reserve estimates. Such an assessment involves a comprehensive analysis of the nature of the event, of policyholder exposures within the affected geographic area and of available claims intelligence. Depending on the nature of the event, available claims intelligence could include surveys of field claims representatives within the affected geographic area, feedback from a catastrophe claims team sent into the area, as well as data on claims reported as of the financial statement date.

To determine whether an event is designated as a catastrophe, related to premiums written on a direct basis by The Cincinnati Insurance Companies, we generally use the catastrophe definition provided by Property Claims Service (PCS), a division of Insurance Services Office. PCS defines a catastrophe as an event that causes U.S., Puerto Rico and U.S. Virgin Islands damage of $25 million or more in insured property losses and affects a significant number of policyholders and insureds.

•For events designated as natural catastrophes resulting in losses for Cincinnati Re and Cincinnati Global, we begin with a review of in-force policies, treaties and related limits likely to be affected by each event. For both Cincinnati Re and Cincinnati Global, use of information from third-party catastrophe models, industry estimates, and our own proprietary adjustments are used for the estimate of ultimate losses for each catastrophe event. Incurred losses from catastrophe events for both Cincinnati Re and Cincinnati Global can be designated catastrophes by PCS, or deemed as a catastrophe by the international insurance industry or, for Cincinnati Re, as reported by ceding companies. IBNR reserves are calculated as the difference between the estimate of the ultimate loss and loss expenses and the sum of total loss and loss expense payments and total case reserves.

•For asbestos and environmental claims, we calculate IBNR reserves by deriving an actuarially-based estimate of total unpaid loss and loss expenses. We then reduce the estimate by total case reserves. We discuss the reserve analysis that applies to asbestos and environmental reserves in Liquidity and Capital Resources, Asbestos and Environmental Loss and Loss Expense Reserves.

•For loss expenses that pertain primarily to salaries and other costs related to our claims department associates, also referred to as adjusting and other expense or AOE, we calculate reserves based on an analysis of the relationship between paid losses and paid AOE. Reserves for AOE are allocated to company, line of business and accident year based on a claim count algorithm. Claim counts reported and used in the reserving process are primarily measured by insurance coverages that are triggered when a loss occurs and a reserve is established. Coverages are defined as unique combinations of certain attributes such as line of business and cause of loss. Claims that are opened and closed without payment are included in the reported claim counts. Claim counts are presented on a direct basis only and do not reflect any assumed or ceded reinsurance.

•For all other claims and events, including reinsurance assumed or ceded, IBNR reserves are calculated as the difference between an actuarial estimate of the ultimate cost of total loss and loss expenses incurred reduced by the sum of total loss and loss expense payments and total case reserves estimated for individual claims. Reserve amounts for those other claims and events are significant, and represent the majority of amounts shown as IBNR reserves and loss expense reserves in the table included in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves. We discuss below the development of actuarially based estimates of the ultimate cost of total loss and loss expenses incurred.

Our actuarial staff applies significant judgment in selecting models and estimating model parameters when preparing reserve analyses. Unpaid loss and loss expenses are inherently uncertain as to timing and amount. Uncertainties relating to model appropriateness, parameter estimates and actual loss and loss expense amounts are referred to as model, parameter and process uncertainty, respectively. Our management and actuarial staff address these uncertainties in the reserving process in a variety of ways.

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Our actuarial staff bases its IBNR reserve estimates for these losses primarily on the indications of methods and models that analyze accident year data. Accident year is the year in which an insured claim, loss or loss expense occurred. The specific methods and models that our actuaries have used for the past several years are:

•paid and reported loss development methods

•paid and reported loss Bornhuetter-Ferguson methods

•individual and multiple probabilistic trend family models

Our actuarial staff uses diagnostics to evaluate the appropriateness of the models and methods listed above. The appropriateness of these models and methods for estimating IBNR reserves tends to depend on the tail for a line of business. Tail refers to the time interval between a typical claim’s occurrence and its settlement. The loss development and Bornhuetter-Ferguson methods, particularly the reported loss variations, tend to produce more appropriate IBNR reserve estimates for our short-tail lines such as homeowner and commercial property. For our mid-tail and long-tail lines, all models and methods provide useful insights.

Our actuarial staff also devotes significant time and effort to the estimation of model and method parameters. The loss development and Bornhuetter-Ferguson methods require the estimation of numerous loss development factors. The Bornhuetter-Ferguson methods also involve the estimation of numerous expected loss ratios by accident year. Models from the probabilistic trend family require the estimation of development trends, calendar year inflation trends and exposure levels. Consequently, our actuarial staff monitors a number of trends and measures to gain key business insights necessary for exercising appropriate judgment when estimating the parameters mentioned, such as:

•company and industry pricing

•company and industry exposure

•company and industry loss frequency and severity

•past large loss events

•company and industry premium

•company in-force policy count

These trends and measures also support the estimation of expected accident year loss ratios needed for applying the Bornhuetter-Ferguson methods and for assessing the reasonability of all IBNR reserve estimates computed. Our actuarial staff reviews these trends and measures quarterly, updating parameters derived from them as necessary.

Quarterly, our actuarial staff summarizes their reserve analysis by preparing an actuarial best estimate and a range of reasonable IBNR reserves intended to reflect the uncertainty of the estimate. An inter-departmental committee that includes our actuarial management team reviews the results of each quarterly reserve analysis. The committee establishes management’s best estimate of IBNR reserves, which is the amount that is included in each period’s financial statements. In addition to the information provided by actuarial staff, the committee also considers factors such as:

•large loss activity and trends in large losses

•new business activity

•judicial decisions

•general economic trends such as inflation

•trends in litigiousness and legal expenses

•product and underwriting changes

•changes in claims practices

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The determination of management’s best estimate, like the preparation of the reserve analysis that supports it, involves considerable judgment. Changes in reserving data or the trends and factors that influence reserving data may signal fundamental shifts or may simply reflect single-period anomalies. Even if a change reflects a fundamental shift, the full extent of the change may not become evident until years later. Moreover, since our methods and models do not explicitly relate many of the factors we consider directly to reserve levels, we typically cannot quantify the precise impact of such factors on the adequacy of reserves prospectively or retrospectively.

Due to the uncertainties described above, our ultimate loss experience could prove better or worse than our carried reserves reflect. To the extent that reserves are inadequate and increased, the amount of the increase is a charge in the period that the deficiency is recognized, raising our loss and loss expense ratio and reducing earnings. To the extent that reserves are redundant and released, the amount of the release is a credit in the period that the redundancy is recognized, reducing our loss and loss expense ratio and increasing earnings.

Key Assumptions – Loss Reserving

Our actuarial staff makes a number of key assumptions when using their methods and models to derive IBNR reserve estimates. Appropriate reliance on these key assumptions essentially entails determinations of the likelihood that statistically significant patterns in historical data may extend into the future. The four most significant of the key assumptions used by our actuarial staff and approved by management are:

•Emergence of loss and defense and cost containment expenses, also referred to as DCCE, on an accident year basis. Historical paid loss, reported loss and paid DCCE data for the business lines we analyze contain patterns that reflect how unpaid losses, unreported losses and unpaid DCCE as of a financial statement date will emerge in the future. Unless our actuarial staff or management identifies reasons or factors that invalidate the extension of historical patterns into the future, these patterns can be used to make projections necessary for estimating IBNR reserves. Our actuaries significantly rely on this assumption in the application of all methods and models mentioned above.

•Calendar year inflation. For long-tail and mid-tail business lines, calendar year inflation trends for future paid losses and paid DCCE do not vary significantly from a stable, long-term average. Our actuaries base reserve estimates derived from probabilistic trend family models on this assumption.

•Exposure levels. Historical earned premiums, when adjusted to reflect common levels of product pricing and loss cost inflation, can serve as a proxy for historical exposures. Our actuaries require this assumption to estimate expected loss ratios and expected DCCE ratios used by the Bornhuetter-Ferguson reserving methods. They may also use this assumption to establish exposure levels for recent accident years, characterized by “green” or immature data, when working with probabilistic trend family models.

•Claims having atypical emergence patterns. Characteristics of certain subsets of claims, such as high frequency, high severity, or mass tort claims, have the potential to distort patterns contained in historical paid loss, reported loss and paid DCCE data. When testing indicates this to be the case for a particular subset of claims, our actuaries segregate these claims from the data and analyze them separately. Subsets of claims that could fall into this category include hurricane claims or claims for other weather events where total losses we incurred were very large, individual large claims and asbestos and environmental claims.

These key assumptions have not changed since 2005, when our actuarial staff began using probabilistic trend family models to estimate IBNR reserves.

Paid losses, reported losses and paid DCCE are subject to random as well as systematic influences. As a result, actual paid losses, reported losses and paid DCCE are virtually certain to differ from projections. Such differences are consistent with what specific models for our business lines predict and with the related patterns in the historical data used to develop these models. As a result, management does not closely monitor statistically insignificant differences between actual and projected data.

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Reserve Estimate Variability

Management believes that the standard error of a reserve estimate, a measure of the estimate’s variability, provides the most appropriate measure of the estimate’s sensitivity. The reserves we establish depend on the models we use and the related parameters we estimate in the course of conducting reserve analyses. However, the actual amount required to settle all outstanding insured claims, including IBNR claims, as of a financial statement date depends on stochastic, or random, elements as well as the systematic elements captured by our models and estimated model parameters. For the lines of business we write, process uncertainty – the inherent variability of loss and loss expense payments – typically contributes more to the imprecision of a reserve estimate than parameter uncertainty.

Consequently, a sensitivity measure that ignores process uncertainty would provide an incomplete picture of the reserve estimate’s sensitivity. Since a reserve estimate’s standard error accounts for both process and parameter uncertainty, it reflects the estimate’s full sensitivity to a range of reasonably likely scenarios.

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.

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Life Policy and Investment Contract Reserves

We establish the reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates and investment yields, including a provision for uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. We use both our own experience and industry experience adjusted for historical trends in arriving at our assumptions for expected mortality and morbidity. We use our own experience and historical trends for setting our assumptions for expected withdrawal rates and expenses. We base our assumptions for expected investment income on our own experience adjusted for current and future expected economic conditions.

We establish reserves for our universal life, deferred annuity and investment contracts equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals. Some of our universal life insurance policies contain no-lapse guarantee provisions. For these policies, we establish a reserve in addition to the account balance based on expected no-lapse guarantee benefits and expected policy assessments.

Asset Impairment

Our investment portfolio is our largest asset. We monitor the fixed-maturity portfolio and all other assets for signs of credit-related or other impairment. We monitor decreases in the fair value of invested assets and the need for an allowance for credit losses for our fixed-maturity portfolio; allowances for expected credit losses on receivable and recoverable assets considering past events, current conditions and reasonable and supportable forecasts; an accumulation of company costs in excess of the amount originally expected to acquire or construct an asset; or other factors such as bankruptcy, deterioration of creditworthiness or failure to pay interest; and changes in legal factors or in the business climate.

The application of our invested assets impairment policy resulted in write-downs of impaired securities intended to be sold that reduced our income before income taxes by $5 million in 2022, $1 million in 2021 and $78 million in 2020. Write-downs represent noncash charges to income and are reported as investment losses. The application of our non-invested assets impairment policy did not have a material effect on our financial condition in 2022 or 2021.

Our internal investment portfolio managers monitor their assigned portfolios. If a fixed-maturity security is valued below amortized cost, the portfolio managers undertake additional reviews. Such declines often occur in conjunction with events taking place in the overall economy and market, combined with events specific to the industry or operations of the issuing organization. Managers review quantitative measurements such as a declining trend in fair value and the extent of the fair value decline, as well as qualitative measures such as pending events, credit ratings and issuer liquidity. We are even more proactive when these declines in valuation are greater than might be anticipated when viewed in the context of overall economic and market conditions. We provide detailed information about fixed-maturity securities fair valued in a continuous loss position at year-end 2022 in Item 7A, Quantitative and Qualitative Disclosures About Market Risk.

An available for sale fixed maturity is impaired if the fair value of the security is below amortized cost. The impaired loss is charged to net income when we have the intent to sell the security or it is more likely than not we will be required to sell the security before recovery of the amortized cost. For impaired securities we intend to hold, an allowance for credit related losses is recorded in investment losses when the company determines a credit loss has been incurred based on certain factors such as adverse conditions, credit rating downgrades or failure of the issuer to make scheduled principal or interest payments. A credit loss is determined using a discounted cash flow analysis by comparing the present value of expected cash flows with the amortized cost basis, limited to the difference between fair value and amortized cost. Noncredit losses are recognized in other comprehensive income as a change in unrealized gains and losses on investments. We provide information about valuations of our invested assets in Item 8, Note 2 of the Consolidated Financial Statements.

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Fair Value Measurements

Valuation of Financial Instruments

Fair value is defined as the exit price or the amount that would be (1) received to sell an asset or (2) paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date. When determining an exit price, we must, whenever possible, rely upon observable market data.

We have categorized our financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level that is significant to the fair value measurement of the instrument. While we consider pricing data from outside services, we ultimately determine whether the data or inputs used by these outside services are observable or unobservable.

Financial assets and liabilities recorded in the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as described in Item 8, Note 3 of the Consolidated Financial Statements.

Level 1 and Level 2 Valuation Techniques

Substantially all of the $21.973 billion of securities in our investment portfolio at year-end 2022, 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.

Recent Accounting Pronouncements

Information about recent accounting pronouncements is provided in Item 8, Note 1 of the Consolidated Financial Statements.

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Financial Results

Consolidated financial results primarily reflect the results of our five reporting segments. These segments are defined based on financial information we use to evaluate performance and to determine the allocation of assets.

•Commercial lines insurance

•Personal lines insurance

•Excess and surplus lines insurance

•Life insurance

•Investments

We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. In addition, Other includes the financial results of our reinsurance assumed operations, known as Cincinnati Re, and our London-based global specialty underwriter known as Cincinnati Global.

We measure profit or loss for our commercial lines, personal lines, excess and surplus lines and life insurance segments based upon underwriting results (profit or loss), which represent net earned premium less loss and loss expenses, or contract holders’ benefits incurred, and underwriting expenses on a pretax basis. We also evaluate results for our consolidated property casualty insurance operations. That is the total of our standard market segments (commercial lines and personal lines), our excess and surplus lines insurance segment, Cincinnati Re and Cincinnati Global. For analysis of our consolidated property casualty insurance results, it is important to include the earned premiums, loss and loss expenses and also underwriting expenses reported as Other. Underwriting results and segment pretax operating income are not substitutes for net income determined in accordance with GAAP.

For our consolidated property casualty insurance operations as well as the insurance segments, statutory accounting data and ratios are key performance indicators that we use to assess business trends and to make comparisons to industry results, since GAAP-based industry data generally is not as readily available.

Investments held by the parent company and the investment portfolios for the insurance subsidiaries are managed and reported as the investments segment, separate from our underwriting business. Net investment income and net investment gains and losses for our investment portfolios are discussed in the Investments Results.

The calculations of segment data are described in more detail in Item 8, Note 18, of the Consolidated Financial Statements. The following sections provide analysis and discussion of results of operations for each of the five segments.

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Consolidated Property Casualty Insurance Results

Earned and net written premiums for our consolidated property casualty operations grew in 2022, 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. Profit decreased in 2022, reflecting increased uncertainty of estimated ultimate losses, due in part to elevated paid losses reflecting economic or other forms of inflation. Our 2022 underwriting profit of $140 million was $591 million less than in 2021, including a $135 million unfavorable effect from a higher amount of catastrophe losses, mostly caused by severe weather. Prior accident year loss experience before catastrophes during 2022 was less favorable than in 2021, and represented $276 million of the 2022 underwriting profit decrease. Elevated inflation effects offset other factors that helped improve underwriting profitability, such as higher pricing and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices. Underwriting profit trends are discussed further below.

The table below highlights property casualty results, with analysis and discussion in the sections that follow. That analysis and discussion includes sections by segment.

Overview – Three-Year Highlights

Performance highlights for consolidated property casualty operations include:

•Premiums – Agency renewal written premiums rose $574 million or 11% in 2022 and continued to contribute to growth in earned premiums and net written premiums that rose in each of our property casualty insurance segments. The renewal premium increase was largely due to average renewal price increases and a higher level of insured exposures. Price increases with enhanced precision continue to benefit operating results.

New business written premiums produced through agencies increased $135 million in 2022, compared with 2021. Agents appointed during 2022 or 2021 produced a 2022 increase in standard lines new business of $45 million.

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Growth initiatives also favorably affect growth in subsequent years, particularly as newer agency relationships mature over time.

Expansion of Cincinnati Re produced $585 million of 2022 net written premiums and contributed $124 million of the growth in other written premiums, compared with 2021. Cincinnati Re assumes risks through reinsurance treaties and in some cases cedes part of the risk and related premiums to one or more unaffiliated reinsurance companies through transactions known as retrocessions. In 2022, earned premiums for Cincinnati Re totaled $520 million.

Cincinnati Global also contributed to the increase in other written premiums. Net written premiums were $230 million in 2022, and contributed $43 million of the growth in other written premiums, compared with 2021. In 2022, earned premiums for Cincinnati Global totaled $206 million.

Other written premiums also include premiums ceded to reinsurers as part of our ceded reinsurance program. An increase in ceded premiums, other than Cincinnati Re and Cincinnati Global premiums, reduced net written premium growth by $51 million in 2022, including $13 million for reinstatement premiums for our property catastrophe reinsurance treaty.

The table below analyzes premium revenue components and trends.

•Combined ratio – The combined ratio increased by 9.8 percentage points in 2022, compared with 2021, including a 1.2 percentage-point increase in the ratio for catastrophe losses. The 2022 ratio for current accident year losses and loss expenses before catastrophes increased by 4.2 percentage points, reflecting inflation effects discussed below. The remainder of the 2022 combined ratio increase included 4.6 percentage points less benefit in the ratio for prior accident year losses and loss expenses before catastrophes. We further discuss ratios related to reserve development in the sections that follow the Catastrophe Losses Incurred table below.

The combined ratio increase and related decrease in property casualty underwriting income in 2022 included higher insured loss experience before catastrophe effects driven by various forms of inflation. Effects of the pandemic also contributed to increased uncertainty regarding ultimate losses. We believe the past two years distorted paid loss cost trends for reasons such as slowed activity for many businesses, reduced driving and closed courts that delayed progress on some litigated insurance claims. Until longer-term paid loss cost trends become more clear, we intend to remain prudent in reserving for estimated ultimate losses. As a result, incurred losses in 2022 for several lines of business were higher than in prior years and are further discussed in results for our commercial lines and personal lines insurance segments.

Elevated inflation was a driver of higher losses and loss expenses as costs have increased significantly to repair damaged autos or other property that we insure. In addition to inflation affecting historic loss patterns, we believe reduced driving during the pandemic resulted in a relatively low level of loss activity in 2021, distorting paid loss cost trends for autos. We also experienced higher losses for liability coverages for some of our lines of business, particularly for commercial umbrella insurance. We believe future property casualty underwriting results will continue to benefit from price increases and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices.

Our statutory combined ratio was 97.7% in 2022 compared with 87.9% in 2021 and 96.7% in 2020. The estimated statutory combined ratio for the property casualty industry, with the industry’s ratio excluding its mortgage and financial guaranty lines of business and based on industry data reported through the first nine months of 2022, was 102.8% in 2022, 99.5% in 2021 and 98.8% in 2020. The contribution of catastrophe losses to our statutory combined ratio was 8.9 percentage points in 2022, 7.6 percentage points in 2021 and 11.2 percentage points in 2020, compared with industry estimates of 7.0, 7.7 and 8.0 percentage points, respectively, with 2022 representing industry data reported through the first nine months of 2022. Components of the combined ratio are discussed below.

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Catastrophe loss trends are an important factor in assessing trends for overall underwriting results. Our 10-year historical annual average contribution of catastrophe losses to the combined ratio was 7.4 percentage points at December 31, 2022. Our five-year average was 8.6 percentage points.

Effective June 1, 2022, we restructured our reinsurance program for Cincinnati Re only, providing retrocession coverages with various triggers and unique features. That program included property catastrophe excess of loss coverage with a total available aggregate limit of $30 million in excess of $100 million per loss. Losses estimated for Hurricane Ian as of December 31, 2022, resulted in an estimated recovery of $19 million. Ultimate loss experience could be lower or higher than that estimate. Reserve estimates are inherently uncertain and our proprietary adjustments and ultimate loss estimates will develop as more information is reported by affected ceding companies.

Effective in May 2022, to provide more capacity to retain risks, we added a quota share reinsurance arrangement for our personal lines risks in California that we insure through excess and surplus lines policies. Approximately 27% of the risk is reinsured through ceded premiums.

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 $25 million. Included in all other 2022 catastrophes is an estimate of $8 million for catastrophe losses and loss expenses incurred, net of reinsurance, for direct exposure within our Other insurance operation to businesses or individuals in Russia or Ukraine.

Catastrophe Losses Incurred

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Consolidated Property Casualty Insurance Loss and Loss Expenses

Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. For all property casualty lines of business in aggregate, net loss and loss expense reserves at December 31, 2022, were $1.029 billion higher than at year-end 2021, including $765 million for incurred but not reported (IBNR) reserves. The $1.029 billion reserve increase raised year-end 2021 net loss and loss expense reserves by 15%, compared with a 12% increase in 2022 earned premiums.

Most of the incurred losses and loss expenses shown in the consolidated property casualty insurance results three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than half of our consolidated property casualty current accident year incurred losses and loss expenses represents net paid amounts, the majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 65.1% accident year 2021 loss and loss expense ratio reported as of December 31, 2021, developed favorably by 1.6 percentage points to 63.5% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2022. Accident years 2021 and 2020 have both developed favorably, as indicated by the progression over time for the ratios in the table.

Catastrophe loss trends, discussed above, accounted for some of the movement in the current accident year loss and loss expense ratio for 2022, compared with 2021. Catastrophe losses added 10.2 percentage points in 2022, 9.1 points in 2021 and 12.7 points in 2020 to the respective consolidated property casualty current accident year loss and loss expense ratios in the table above.

The 60.2% ratio for current accident year loss and loss expenses before catastrophe losses for 2022 increased 4.2 percentage points compared with the 56.0% accident year 2021 ratio measured as of December 31, 2021. The increase included 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.

Reserve development on prior accident years continued to net to a favorable amount in 2022, and was primarily due to less-than-anticipated loss emergence on known claims. We recognized $159 million of favorable development in 2022, compared with $428 million in 2021 and $131 million in 2020. Of the $269 million decrease in 2022, compared with 2021, $264 million was attributable to our commercial casualty, commercial property and commercial auto lines of business. Approximately 74% of our net favorable reserve development on prior accident years recognized during 2022 occurred in our workers' compensation and homeowner lines of business. In 2021, our commercial casualty, commercial property and workers' compensation lines of business were responsible for approximately 66% of the favorable reserve development. As discussed in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves, Property Casualty Insurance Development of Estimated Reserves by Accident Year, commercial casualty and workers' compensation are considered long-tail lines with the potential for revisions inherent in estimating reserves. Favorable development recognized during 2020 was primarily from our commercial casualty and workers’ compensation lines of business. Development by accident year is further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.

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Consolidated Property Casualty Insurance Losses by Size

In 2022, total large losses incurred increased by $79 million, or 17%, net of reinsurance, primarily due to an increase for our personal lines insurance segment. The corresponding 2022 ratio increased 0.3 percentage points, compared with 2021. The large loss data included in the table above does not include Cincinnati Re and Cincinnati Global. Our analysis of large losses incurred indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.

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Consolidated Property Casualty Insurance Underwriting Expenses

Consolidated property casualty commission expenses rose $151 million, or 13%, in 2022, with profit-sharing commissions for agencies decreasing by $5 million. The 2022 ratio of commission expenses as a percent of earned premiums increased by 0.2 percentage points, compared with 2021. The 2022 ratio for other underwriting expenses decreased by 0.4 percentage points, compared with 2021. Earned premiums rose at a faster pace than other underwriting expenses during 2022, and we continued to carefully manage expenses while also making strategic investments that include enhancement of underwriting expertise.

Commission expenses include our profit-sharing commissions, which are primarily based on one-year and three-year profitability of an agency’s business. The aggregate profit trend for agencies that earn these profit-based commissions can differ from the aggregate profit trend for all agencies reflected in our consolidated property casualty results.

Salaries, benefits and payroll taxes for our associates account for approximately half of our property casualty other underwriting expenses. Most of our associates either provide direct service to the property casualty portion of our agencies’ businesses or provide support to those associates.

Discussions below of our property casualty insurance segments provide additional details about our results.

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Commercial Lines Insurance Results

Overview – Three-Year Highlights

Performance highlights for the commercial lines insurance segment include:

•Premiums – Earned premiums and net written premiums rose in 2022, including a $338 million, or 10%, increase in renewal written premiums that continued to include higher average pricing and a higher level of insured exposures. New business written premiums in 2022 increased $29 million, or 5%, compared with 2021.

•Combined ratio – The 2022 combined ratio increased by 15.4 percentage points compared with 2021, including a 3.6 percentage-point increase in the ratio component for catastrophe losses. Development on prior accident years loss and loss expense reserves before catastrophes during 2022 was 7.1 percentage points less favorable than in 2021. The 2022 combined ratio also increased 5.1 points from current accident year loss and loss expenses before catastrophe losses, including 3.7 points from commercial umbrella coverages discussed below.

When estimating the ultimate cost of total loss and loss expenses, we consider many factors, including trends for inflation, historical paid and reported losses, large loss activity and other data or information for the industry or our company. Elevated inflation was a driver of higher losses and loss expenses as costs have increased significantly to repair damaged business property or autos that we insure. In addition to inflation causing deviations from historical loss patterns, we believe reduced driving during the pandemic resulted in a relatively low level of loss activity in 2021 and 2020, distorting paid loss cost trends for autos. Due to increased uncertainty regarding ultimate losses, we intend to remain prudent in reserving for estimated ultimate losses until longer-term loss cost trends become more clear.

Commercial umbrella coverages, part of our commercial casualty line of business that help protect businesses against liability from occurrences such as accidents or injuries, contributed significantly to the increase in 2022 ratios for losses and expenses. Incurred losses and loss expenses for commercial umbrella coverages of

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$416 million in 2022 increased $249 million, or 149%, compared with 2021, due in part to net paid losses of $223 million increasing $101 million, or 83%, while earned premiums rose 10%. Severe losses from commercial auto accidents were the primary source of our commercial umbrella claims during 2022 and also in recent years.

Commercial umbrella paid loss experience is inherently variable. For example, net paid losses rose 80% in 2019 and 18% in 2021 while decreasing by 35% in both 2018 and 2020. Commercial umbrella net earned premiums were $499 million for 2022 and represented approximately 35% of our commercial casualty premiums for both 2022 and 2021. The profile of coverage limits for policies in force at the end of 2022 included 43% with $1 million of coverage per policy, 91% with $5 million or less and 99% with $10 million or less of coverage. Our commercial umbrella insurance coverages have a strong record of profitability for us, including an estimated combined ratio averaging below 85% for the five years ending in 2022.

Pricing precision and other initiatives to improve commercial lines underwriting profitability complement our business practices that continue to leverage the local presence of our field associates. Field marketing representatives meet with local agencies to assess each risk, determine limits of insurance and establish appropriate terms and conditions. They underwrite new business, with collaboration and expertise from headquarters associates as needed, while field loss control, machinery and equipment and claims representatives conduct on-site inspections. Field claims representatives also assist underwriters by preparing full reports on their first-hand observations of risk quality.

Our commercial lines statutory combined ratio was 98.5% in 2022, compared with 83.2% in 2021 and 97.5% in 2020. The contribution of catastrophe losses to our commercial lines statutory combined ratio was 7.0 percentage points in 2022, 3.4 percentage points in 2021 and 10.4 percentage points in 2020.

Commercial Lines Insurance Premiums

We continue to refine our use of predictive analytics tools to improve pricing precision as we further segment commercial lines policies, emphasizing identification and retention of policies we believe have relatively stronger price adequacy. These tools better align individual insurance policy pricing to risk attributes, providing our underwriters with enhanced abilities to target profitability and to discuss pricing impacts with our agencies. We also continue to leverage our local relationships with agents through the efforts of our teams that work closely with them. We believe our field focus is unique and has several advantages, including providing us with quality intelligence on local market conditions. We seek to maintain appropriate pricing discipline for both new and renewal business as management continues to emphasize the importance of our agencies and underwriters assessing account quality to make careful decisions on a case-by-case basis whether to write as new business or renew a policy. Premium rate credits may be used to retain renewals of quality business and to earn new business, but we do so selectively in order to avoid commercial accounts that we believe have insufficient profit margins.

Our 10% increase in 2022 agency renewal written premiums included higher average pricing. We measure average changes in commercial lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies. In 2022, our standard commercial lines policies averaged an estimated pricing change at a percentage in the mid-single-digit range, higher than 2021. Our average commercial lines pricing change includes the flat pricing effect of certain coverages within package policies written for a three-year term that were in force but did not expire during the period being measured. Therefore, the average commercial lines pricing change we report reflects a blend of policies that did not expire and other policies that did expire during the measurement period.

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For only those commercial lines policies that did expire and were then renewed during 2022, we estimate that the average price increase was at a percentage near the high end of the mid-single-digit range. During 2022, 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.

Our 2022 increase of 10% for the commercial lines segment's agency renewal written premiums also included a higher level of insured exposures. Part of the insured exposure increase reflects our response to inflation effects that increase the cost of building materials to repair damaged commercial structures. We use building valuation software to automate much of that underwriting process and may also manually adjust premiums to reflect property costs. For our commercial property line of business, premium adjustments for such costs during 2022 were about double the level they were for the same period a year ago.

Changes in the economy can affect insured exposures that directly relate to premium amounts charged for some policies. For commercial accounts, we usually calculate initial estimates for general liability premiums based on estimated sales or payroll volume, while we calculate workers’ compensation premiums based on estimated payroll volume. A change in sales or payroll volume generally indicates a change in demand for a business’s goods or services, as well as a change in its exposure to risk. Policyholders who experience sales or payroll volume changes due to economic factors may also have other exposures requiring insurance, such as commercial auto or commercial property. Premium levels for these other types of coverages generally are not linked directly to sales or payroll volumes.

Premiums resulting from audits of actual sales or payrolls that confirmed or adjusted initial premium estimates are part of net written premiums and earned premiums. The contribution to our commercial lines earned premiums was $127 million, $47 million and $41 million in 2022, 2021 and 2020, respectively. The contribution on a net written premium basis was $101 million, $44 million and $53 million in 2022, 2021 and 2020, respectively. These net written premium amounts are included with agency renewal written premiums in the Commercial Lines Insurance Premiums table above.

In 2022, our commercial lines new business premiums written by our agencies increased $29 million, or 5%, compared with 2021. New business premium volume in recent years has been significantly influenced by new agency appointments. Agencies appointed since the beginning of 2021 produced commercial lines new business written premiums of $52 million, in aggregate, during 2022, up $30 million from what they produced during 2021. All other agencies contributed the remaining $548 million, down $1 million from the $549 million they produced in 2021.

For new business, our field associates are frequently in our agents’ offices to: help judge the quality of each account; emphasize the Cincinnati value proposition; call on sales prospects with those agents; and provide appropriate quotes after carefully evaluating risk exposures. Some of our new business comes from accounts that are not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that is new to us and the agency. As we appoint new agencies who choose to move accounts to us, we report these accounts as new business to us.

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 $26 million in 2022.

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Commercial Lines Insurance Loss and Loss Expenses

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 development on the related claims. The table below illustrates that development. For example, the 62.4% accident year 2021 loss and loss expense ratio reported as of December 31, 2021, developed favorably by 1.6 percentage points to 60.8% due to claims settling for less than previously estimated, or due to updates to reserve estimates for unpaid claims, as of December 31, 2022. Accident years 2021 and 2020 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 2022, compared with 2021. Catastrophe losses added 7.6 percentage points in 2022, 4.6 points in 2021 and 10.8 points in 2020 to the respective commercial lines current accident year loss and loss expense ratios in the table above.

The 62.9% ratio for current accident year loss and loss expenses before catastrophe losses for 2022 increased 5.1 percentage points compared with the 57.8% accident year 2021 ratio measured as of December 31, 2021. The increase included an increase in large losses incurred, described below, and the corresponding ratios for new losses above $1 million, with a 0.6 percentage-point increase in the 2022 ratio. Other contributions included inflation effects that offset the favorable impact from various initiatives, such as those to improve pricing precision and loss experience related to claims and loss control practices.

Commercial lines reserve development on prior accident years of $76 million in 2022 continued to net to a favorable amount and provided a smaller benefit than the $353 million recognized in 2021. The $277 million net decrease in 2022, compared with 2021, included $144 million, $66 million and $54 million from our commercial casualty, commercial auto and commercial property lines of business, respectively. Most of our commercial lines net favorable reserve development on prior accident years recognized during 2022 occurred in our workers’ compensation and commercial property lines of business. Unfavorable development recognized during 2022 for our commercial casualty lines of business totaled $25 million, including $41 million for commercial umbrella coverages. The $41 million of net unfavorable development for commercial umbrella coverages included an unfavorable $107 million for accident years 2018 through 2021 and a net favorable $66 million for all accident years prior to 2018. Favorable development recognized during 2021 was mostly from our commercial casualty, commercial property and workers’ compensation lines of business and during 2020 it was mostly from our commercial casualty and workers' compensation lines of business. As discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, stable historical paid loss patterns are a key assumption used to make projections necessary for estimating IBNR reserves. 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.

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Commercial Lines Insurance Losses by Size

In 2022, total large losses incurred increased by $17 million, or 4%, net of reinsurance. The corresponding 2022 ratio decreased 0.5 percentage points, compared with 2021, as premium growth outpaced growth in total large losses. The 2022 increase on a dollar basis was due to higher amounts for our commercial casualty and commercial auto lines of business, by $28 million and $25 million, respectively. The $28 million 2022 increase for commercial casualty included $21 million for commercial umbrella coverages, while the net amount for other coverages increased by $7 million. In 2021, total large losses incurred and the corresponding ratio were higher than in 2020, largely due to higher amounts of large losses for our commercial casualty and commercial property lines of business. Our analysis indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.

Commercial Lines Insurance Underwriting Expenses

Commercial lines commission expenses as a percent of earned premiums decreased in 2022, compared with 2021, primarily due to a decrease in the ratio for profit-sharing commissions for agencies. The ratio for 2021 increased compared with 2020, reflecting an increase in the ratio for profit-sharing commissions for agencies. In 2022, other underwriting expenses as a percent of earned premiums decreased, compared with 2021, reflecting ongoing

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expense management efforts and premium growth outpacing growth in expenses. In 2021, other underwriting expenses as a percent of earned premiums decreased, compared with 2020, reflecting lower levels of uncollectible premiums, ongoing expense management efforts and higher earned premiums.

Commercial Lines Insurance Outlook

Renewal and new business pricing for commercial risks continues to experience significant competitive pressure, reinforcing the need for enhanced pricing analytics and careful risk selection. Despite challenging market conditions from strong competition, we believe we can manage our business and execute strategic initiatives to offset market pressures and profitably grow our commercial lines insurance segment.

We intend to grow our commercial lines segment through additional agency appointments, expansion of our local field presence, enhanced expertise and a robust product catalog that meets the needs of an even larger percentage of our agencies' total commercial portfolio. Our goal is to provide flexibility in our process so that we can deliver an industry-leading agency experience to all of our agents as we work to be the first and last solution when they are considering business placement.

We intend to keep marketing our products to a broad range of business classes with a total account approach, while also continuing improvement of our pricing precision and further segmentation among commercial lines policies. We intend to maintain our underwriting discipline and carefully manage our rate levels as well as our programs that seek to accurately match exposures with appropriate premiums. We will continue to evaluate each risk on a policy-by-policy basis, making decisions about rates, terms and conditions based on each account’s individual characteristics. We believe that our initiatives to improve pricing precision and lower loss costs will continue to benefit commercial lines profitability during 2023, and that recent-year premium growth initiatives will continue to grow commercial lines premiums at a healthy pace.

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Personal Lines Insurance Results

Overview – Three-Year Highlights

Performance highlights for the personal lines insurance segment include:

•Premiums – Earned premiums and net written premiums continued to grow in 2022, largely due to increases in renewal written premiums that included higher average pricing and a higher level of insured exposures. Renewal written premiums rose $167 million, or 12%, in 2022, compared with 2021. Net written premiums from high net worth policies in 2022 totaled approximately $919 million, compared with $663 million in 2021, including $63 million and $32 million, respectively, from excess and surplus lines homeowner policies. Our high net worth policies represented 50.2% of our 2022 personal lines net written premiums. In 2023, we renamed our high net worth products and services, Cincinnati Private ClientSM, a naming convention commonly used to describe clients with complex needs.

•Combined ratio – The 2022 combined ratio increased by 5.2 percentage points, compared with 2021, including a 2.3 percentage-point decrease in the ratio for catastrophe losses. Development on prior accident years’ loss and loss expense reserves before catastrophes during 2022 was 1.8 percentage points less favorable than in 2021. The 2022 combined ratio also included an increase of 5.3 percentage points from current accident year loss and loss expenses before catastrophe losses, with our personal auto and homeowner lines of business each representing approximately 2 points.

When estimating the ultimate cost of total loss and loss expenses, we consider many factors, including trends in inflation, historical paid and reported losses, large loss activity and other data or information for the industry or our company. Elevated inflation was a driver of higher losses and loss expenses as costs have increased significantly to repair damaged autos or homes that we insure. In addition to inflation causing deviations from historical loss patterns, we believe reduced driving during the pandemic resulted in a relatively low level of loss activity in 2021 and 2020, distorting paid loss cost trends for autos. Due to increased uncertainty regarding ultimate losses, we

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intend to remain prudent in reserving for estimated ultimate losses until longer-term loss cost trends become more clear. For example, personal auto incurred loss and loss expenses before catastrophe losses increased $109 million, or 30%, in 2022, compared with the same period of 2021, in part due to paid losses before catastrophes increasing $53 million, or 17%, while earned premiums rose 3%.

We have increased our pricing precision and implemented numerous rate increases in recent years to improve our personal lines insurance segment results. In addition, we have made greater use of higher minimum loss deductibles and enhanced our property inspection processes to verify condition and insurance to value. We have worked to improve our geographic diversification by expanding our personal lines operation to several states less prone to catastrophes.

Our personal lines statutory combined ratio was 97.7% in 2022, compared with 93.5% in 2021 and 96.4% in 2020. The contribution of catastrophe losses to our personal lines statutory combined ratio was 11.4 percentage points in 2022, 13.7 percentage points in 2021 and 15.4 percentage points in 2020.

Personal Lines Insurance Premiums

Personal lines insurance is a strategic component of our overall relationship with most of our agencies and is an important component of our agencies’ relationships with their clients. We believe agents recommend our personal insurance products to their clients who seek to balance quality and price and who are attracted by our superior claims service and the benefits of our package approach. We also believe our continuing efforts to improve pricing precision are helping us attract and retain more of our agencies’ preferred business, while also obtaining higher rates for more thinly priced business.

The 12% increase in agency renewal written premiums in 2022 included the effect of various rate changes. We estimate that premium rates for our personal auto line of business increased at average percentages in the low-single-digit range during 2022, with some individual policies experiencing lower or higher rate changes based on enhanced pricing precision enabled by predictive models that consider characteristics of specific risks. We expect full-year 2023 written premiums will include an average rate increase of approximately 10% for our personal auto line of business. For our homeowner line of business, we estimate that rate increases during 2022 averaged in the mid-single-digit range. Similar to our personal auto line of business, that average varied widely by state, and some individual policies experienced lower or higher rate changes based on pricing precision and current rate level indications that helped determine appropriate premium rates.

The 12% increase in agency renewal written premiums in 2022 also included a higher level of insured exposures and other factors such as changes in policy deductibles or mix of business. Part of the insured exposure increase reflects our response to inflation effects that increase the cost of building materials to repair damaged homes. In recent years, prior to 2022, our homeowner policies used inflation factors that adjusted premiums for such costs annually and averaged increases in the mid-single-digit percentage range. Beginning in 2022, the adjustment occurred quarterly and the inflation factors were in the high-single-digit percentage range for the last three quarters of the year.

Personal lines new business written premiums grew by $94 million, or 47%, during 2022, compared with 2021, including $77 million from high net worth policies. Approximately $21 million of the 2022 increase was from excess and surplus lines homeowner policies and $56 million was from other high net worth policies. We believe we maintained underwriting and pricing discipline and growth was also supported by expanded use of enhanced pricing precision tools. 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.

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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 $23 million in 2022.

Personal Lines Insurance Loss and Loss Expenses

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 67.6% accident year 2021 loss and loss expense ratio reported as of December 31, 2021, developed favorably by 3.4 percentage points to 64.2% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2022. Accident years 2021 and 2020 for the personal lines insurance segment have both developed favorably, as indicated by the progression over time for 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 2022, compared with accident year 2021. Catastrophe losses added 14.0 percentage points in 2022, 14.2 points in 2021 and 16.0 points in 2020 to the respective personal lines current accident year loss and loss expense ratios in the table above. Personal lines catastrophe losses for 2022 resulted in a ratio higher than our 10.8% 10-year annual average for personal lines. Personal lines catastrophe losses are inherently volatile, as discussed above and in Consolidated Property Casualty Insurance Results.

The 58.7% ratio for current accident year loss and loss expenses before catastrophe losses for 2022 increased 5.3 percentage points compared with the 53.4% accident year 2021 ratio measured as of December 31, 2021. The increase included an increase in large losses incurred, described below, and the corresponding ratios for new losses above $1 million, with a 2.0 percentage-point increase in the 2022 ratio. Other contributions included inflation effects that offset the favorable impact 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 2022 was favorable by $61 million, in aggregate, compared with $50 million in 2021. The 2022 net favorable reserve development included $54 million for our homeowner line of business. The 2021 net favorable reserve development included $31 million for our personal auto line of business and $14 million for our homeowner line of business. As discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, stable historical paid loss patterns are a key assumption used to make projections necessary for estimating IBNR reserves. 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.

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Personal Lines Insurance Losses by Size

In 2022, personal lines total large losses incurred increased by $53 million, or 79%, net of reinsurance. The corresponding 2022 ratio increased 2.7 percentage points, compared with 2021. The 2022 increase was primarily due to a higher amount for our homeowner line of business. In 2021, total large losses increased on a dollar basis, compared with 2020, primarily due to a higher amount for umbrella coverage in our other personal line of business that was partially offset by a lower amount for our homeowner line of business. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.

Personal Lines Insurance Underwriting Expenses

Personal lines commission expense as a percent of earned premiums increased in 2022, compared with 2021, primarily due to an increase in commissions for agencies other than profit-sharing commissions. The ratio for 2021 increased compared with 2020, largely due to an increase in the ratio for profit-sharing commissions for agencies. In 2022, other underwriting expenses as a percent of earned premiums matched 2021, reflecting ongoing expense management efforts, as the pace of premium growth was in line with growth in other expenses. Other underwriting expenses as a percent of earned premiums in 2021 decreased, compared with 2020, primarily due to 2020 including a $16 million Stay-at-Home policyholder credit for personal auto policies.

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Personal Lines Insurance Outlook

Various publications describing the U.S. property casualty industry in 2022 noted challenges, including elevated inflation, increasing loss costs and pricing pressures as insurers seek rate adequacy. We continue to respond with rate increases, pricing precision for individual risks and use of inflation factors that respond to higher costs to repair property. We believe we can continue to profitably grow premiums in our personal lines insurance segment through new agency appointments and ongoing focus on the high net worth personal lines market. Drivers of our profitable growth for our high net worth business also include selectively using non-admitted insurance property forms and rates in certain catastrophe-prone states and geographies.

Our high net worth initiative, along with various other actions to improve performance in our personal lines insurance segment, is discussed in greater detail in Personal Lines Insurance Results and also in Item 1, Our Business and Our Strategy, Strategic Initiatives and Our Segments, Personal Lines Insurance Segment.

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Excess and Surplus Lines Insurance Results

Overview – Three-Year Highlights

Our excess and surplus lines insurance segment includes results of The Cincinnati Specialty Underwriters Insurance Company and CSU Producer Resources Inc. Performance highlights for this segment include:

•Premiums – Earned premiums and net written premiums continued to grow during 2022, including higher renewal written premiums that included average renewal estimated price increases in the high-single-digit range. New business written premiums rose 10% in 2022, compared with 2021, and also contributed to premium growth.

•Combined ratio – The combined ratio increased by 0.9 percentage points in 2021, driven by an increase in the ratio for current accident year loss and loss expenses before catastrophe losses. Approximately 92% of our 2022 earned premiums for the excess and surplus lines insurance segment provided commercial casualty coverages for various insured liability losses that have experienced elevated inflation. Due to increased uncertainty regarding ultimate losses, we intend to remain prudent in reserving for estimated ultimate losses until longer-term loss cost trends become more clear. Incurred losses and loss expenses for excess and surplus lines commercial casualty coverages of $302 million in 2022 increased $69 million or 30%, compared with 2021, in part due to paid losses of $82 million increasing $20 million, or 32%, while earned premiums rose 23%. The ratio for prior accident year loss and loss expenses before catastrophe losses decreased, following a period where loss reserves for prior accident years were increased due to older claims settling for higher amounts than expected.

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Excess and Surplus Lines Insurance Premiums

The $69 million increase in 2022 renewal premiums reflected the opportunity to renew many policies for the first time as well as higher renewal pricing. Average renewal estimated price increases were in the high-single-digit range during 2022. We measure average changes in excess and surplus lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies.

New business written premiums in 2022 grew by $12 million, or 10%, compared with 2021, as we continued to carefully underwrite each policy in a highly competitive market. Other written premiums in 2022 reduced net written premium growth by $5 million more than in 2021, and are primarily premiums that are ceded to reinsurers and therefore reduce our net written premiums.

Excess and Surplus Lines Loss and Loss Expenses

Loss and loss expenses include both net paid losses and reserve changes for unpaid losses, as well as the associated loss expenses. The majority of the total incurred losses and loss expenses shown above in the three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than 20% of our excess and surplus lines current accident year incurred losses and loss expenses represents net paid amounts, a large majority represents reserves for our estimate of unpaid losses and loss expenses. These reserves develop over time, and we update our estimates of previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 59.0% accident year 2020 loss and loss expense ratio reported as of December 31, 2020, did not change as of December 31, 2021, as favorable reserve development during 2021 was less than $1 million. During 2022, it developed favorably by 4.2 percentage points to 54.8% due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2022. Accident year 2021 for this segment developed unfavorably during 2022, 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 among components of the current accident year loss and loss expense ratio for accident year 2022, compared with 2021. Catastrophe losses added 1.0 percentage point in 2022, 0.6 percentage points in 2021 and 1.3 percentage points in 2020 to the respective excess and surplus lines current accident year loss and loss expense ratios in the table above.

The 65.7% ratio for current accident year loss and loss expenses before catastrophe losses for 2022 increased by 5.4 percentage points compared with the 60.3% accident year 2021 ratio measured as of December 31, 2021. The increase included a 0.9 percentage-point increase in the ratio for current accident year losses of $1 million or more per claim, shown in the table below.

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Excess and surplus lines reserve development on prior accident years was a net favorable $9 million for 2022 and a net unfavorable $7 million for 2021. The net favorable amount for 2022 was primarily for accident year 2020. The 2021 unfavorable reserve development on prior accident years reflected what we believe are now adequate reserves for estimated ultimate losses and loss expenses, as reserves were increased due to older claims settling for higher amounts than expected.

We believe the loss and loss expense reserves for our excess and surplus lines business are adequate. The amount of outstanding reserves for our excess and surplus lines operation can be seen in a table in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves. One indication of how long it takes for most of the outstanding reserves to be settled is to measure outstanding reserves by accident year at different points in time, using Item 8, Note 4 of the Consolidated Financial Statements. For example, for accident years 2015, 2014 and 2013, in aggregate, after subtracting cumulative paid amounts from incurred amounts at December 31, 2015, reserves for estimated unpaid losses, plus the portion of loss expenses known as ALAE, equaled $187 million. For those same accident years, at December 31, 2022, the reserve estimate for the remaining unpaid amount equaled $5 million. As discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, stable historical paid loss patterns are a key assumption used to make projections necessary for estimating IBNR reserves. The inherent uncertainty in estimating reserves is discussed in Liquidity and Capital Resources, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves. Development trends by accident year are further discussed in Property Casualty Insurance Development of Estimated Reserves by Accident Year.

Excess and Surplus Lines Insurance Losses by Size

In 2022, total large losses increased by $9 million, net of reinsurance. The ratio for 2022 large losses as a percent of earned premiums increased by 1.1 percentage points, compared with 2021. That ratio for 2021 increased by 2.2 points, compared with 2020. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.

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Excess and Surplus Lines Insurance Underwriting Expenses

Excess and surplus lines commission expense as a percent of earned premiums for 2022 decreased compared with 2021, largely due to a decrease in the ratio for profit-sharing commissions for agencies. The ratio for 2021 decreased slightly compared with 2020, despite a slight increase in the ratio for profit-sharing commissions for agencies. The ratio for other underwriting expenses decreased in both 2022 and 2021, reflecting ongoing expense management efforts and premium growth outpacing growth in expenses.

Excess and Surplus Lines Outlook

The excess and surplus lines market is expected to see the magnitude of rate increases moderate for risks that are casualty-driven. For property risks involving catastrophe exposures, premium rates in the foreseeable future are expected to be firm. New business opportunities are expected to increase as standard market insurance companies continue to re-underwrite business they previously took from the excess and surplus lines market and as larger excess and surplus lines companies re-underwrite their business with an emphasis on underwriting profitability. Firming is expected to continue for specific classes of business where loss costs are exceeding rates, such as habitational for property and general liability coverages and liquor liability for general liability coverages.

Industry reports suggest that there are opportunities for profitability and growth through greater use of technology. Technology and data are also being used by excess and surplus lines insurance companies to identify new exposures in emerging businesses that need insurance protection or other value-added services.

Our strategy of providing superior service is expected to continue to grow our excess and surplus lines insurance segment and to achieve profitability despite challenging market conditions. We intend to keep carefully selecting and pricing risks, providing prompt delivery of insurance quotes and policies and giving outstanding claims and loss control service from local field representatives who also handle the standard lines business for their assigned agencies. These local representatives are supported by headquarters underwriters and claims managers who specialize in excess and surplus lines.

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Life Insurance Results

Overview – Three-Year Highlights

The COVID-19 pandemic did not have a significant effect on our life insurance segment earned premiums or underwriting expenses for any of the three years ending in 2022. However, the pandemic did contribute to an increase in death claims, primarily in 2021. It is possible we may continue to experience higher than projected future death claims due to the pandemic.

Performance highlights for the life insurance segment also included:

•Revenues – Earned premiums decreased 1% for the year 2022, as shown in the table below that includes details by major line of business. Our largest life insurance product line, term life insurance, rose 5%. Net in-force policy face amounts rose 4% to $80.482 billion at year-end 2022 from $77.493 billion at year-end 2021 and $73.475 billion at year-end 2020.

•Profitability – The life insurance segment frequently reports only a small profit or loss because most of its investment income is included in the investments segment results. We include only investment income credited to contract holders (interest assumed in life insurance policy reserve calculations) in life insurance segment results. A profit of $28 million for our life insurance segment in 2022, compared with a loss of $16 million in 2021 and $11 million of profit in 2020, was primarily due to more favorable impacts from the unlocking of interest rate and other actuarial assumptions and more favorable mortality experience. The life insurance segment has averaged an annual profit of $6 million over the past five years.

Earned premiums decreased $3 million in 2022, primarily due to a $13 million decrease in universal life earned premiums. Universal life insurance earned premiums can vary, including from changes in interest rate or other actuarial assumptions. Earned premiums increased $10 million in our term life insurance business in 2022. Growth in 2021 was primarily due to term life insurance.

Products we market include term, whole and universal life insurance and also fixed annuities. In addition, we offer term and whole life insurance to employees at their worksite. These products provide our property casualty agency force with excellent cross-serving opportunities for both commercial and personal accounts.

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 34 life field marketing representatives work in partnership with our property casualty field marketing representatives. Approximately 65% of our term and other life insurance product premiums were generated through our property casualty insurance agency relationships.

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Life insurance segment expenses consist principally of:

•Contract holders’ benefits incurred, related to traditional life and interest-sensitive products, accounted for 77.9% of 2022 total benefits and expenses compared with 80.2% in 2021 and 77.7% in 2020. Total contract holders’ benefits decreased as net death claims were lower in 2022, compared with 2021, and were slightly above our mortality projections.

•Underwriting expenses incurred, net of deferred acquisition costs, accounted for 22.1% of 2022 total benefits and expenses compared with 19.8% in 2021 and 22.3% in 2020. Expenses in 2022 matched 2021, compared with a decrease of 1% in earned premiums. Expenses in 2021 decreased 1%, compared with 3% growth in earned premiums. In 2022, unlocking of interest rate and other actuarial assumptions increased the amount of expenses deferred to future periods, decreasing underwriting expenses. In 2021, unlocking of interest rate and other actuarial assumptions decreased the amount of expenses deferred to future periods, increasing underwriting expenses.

Life insurance segment profitability depends largely on premium levels, the adequacy of product pricing, underwriting skill and operating efficiencies. This segment’s results include only investment interest credited to contract holders (interest assumed in life insurance policy reserve calculations). The remaining investment income is reported in the investments segment results. The life investment portfolio is managed to earn target spreads between earned investment rates on general account assets and rates credited to policyholders. We consider the value of assets under management and investment income for the life investment portfolio as key performance indicators for the life insurance segment. We seek to maintain a competitive advantage with respect to benefits paid and reserve increases by consistently achieving better than average claims experience due to skilled underwriting.

We recognize that assets under management, capital appreciation and investment income are integral to evaluation of the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and investment gains or losses from life insurance-related invested assets, our life insurance subsidiary reported net income of $66 million in 2022, compared with $44 million in 2021 and $32 million in 2020. The life insurance subsidiary portfolio had after-tax net investment losses of $2 million in 2022, after-tax net investment gains of $8 million in 2021 and after-tax net investment losses of $21 million in 2020. Investment gains and losses are discussed under Investments Results. We exclude most of our life insurance company investment income from investments segment results.

Life Insurance Outlook

The markets for life and annuity products have both been impacted by inflation. Life insurance sales are likely to remain under pressure in the near term as potential clients have reduced discretionary income to spend. As inflation moderates and barring a moderate to severe recession, we expect to see good growth opportunities later in 2023. Fixed annuities have attracted a lot of attention due to market volatility and passage of the SECURE 2.0 Act of 2022. We expect to benefit when we introduce a new product in the first half of 2023. The current yield curve has allowed us to increase our net earned rate on new asset purchases and reinvestments, and we expect investment income to continue to grow unless a sharp recession compels the Federal Reserve to reverse course and usher in another round of quantitative easing.

We believe the worst of the pandemic is behind us. However, we recognize that there is uncertainty surrounding the long-term health impact of COVID-19 infections, higher rates of psychological stress and some concern that fewer medical screenings over the past few years may lead to higher rates of cancer in the future. All of these could adversely impact mortality results. Conversely, the recent favorable trends in mortality in our book could be an early indication that a significant number of death claims from 2021 and the first two months of 2022 were an acceleration of claims that will lead to favorable mortality results in the near term.

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Investments Results

Overview – Three-Year Highlights

Investments Results

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.

•Investment income – Pretax investment income grew $67 million, or 9%, in 2022, due to increases from dividends and interest income. Dividend income grew 12%, reflecting dividend rates that are rising more slowly, minor asset allocation adjustments in our equity portfolio and net purchases of equity securities from available funds. Interest income grew 7% in 2022, compared with 2021, as net purchases of fixed-maturity securities in recent years and rising bond yields are working to generally offset effects of the low interest rate environment of the past several years. Pretax investment income rose 7% in 2021, including increases in interest and dividend income. Average yields in the investment income table below are based on the average invested asset and cash amounts indicated in the table using fixed-maturity securities valued at amortized cost and all other securities at fair value.

•Investment gains and losses – We reported an investment loss in 2022, due to unfavorable changes in fair values of equity securities even though we continue to hold the securities or as otherwise required by GAAP. We reported an investment gain in 2021 and 2020, primarily due to favorable changes in fair values of equity securities.

We believe it is useful to analyze our overall investment performance by using total investment return over several years. Total investment return considers changes in unrealized gains and losses that are not included in net income, in addition to net investment income and investment gains and losses that are included in net income. Changes in unrealized gains and losses shown in the table below include other invested assets. Considering total investment gains and losses over several years helps evaluate performance since gains and losses may experience typical variability during shorter periods of time.

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The table below shows total return based on assumptions that simplify cash flow timing that is commonly used in total return measures. This simplified calculation uses data shown in our consolidated financial statements or notes to those statements. Added to invested asset amounts from our consolidated balance sheets are 50% of annual amounts pertaining to invested asset categories included in net cash used in investing activities from our consolidated statements of cash flows. The cash flow amounts are reduced by net gains from investment portfolio securities sales or called bonds, with the net result reduced by 50% to represent estimated new cash invested during each respective year. All new cash is assumed to be invested at the midpoint of the year.

Total investment return of negative 9.2% in 2022 was significantly less than in 2021. The 2022 contribution from the investment income component was offset by the net unfavorable effect of the investment gains and losses components. Comparing contributions for 2022 with 2021, investment income rose $67 million, investment gains decreased by $3.876 billion and the invested assets net change in unrealized gains and losses decreased by $1.405 billion. The base component of the return calculation, annual average invested assets, was up 14% in 2022. For 2021 compared with 2020, total investment return rose by 3.3 percentage points, primarily due to a more favorable net effect of the investment gains and losses. The base component of the return calculation, annual average invested assets, increased 10% in 2021.

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Investment Income

The primary drivers of investment income are highlighted below, followed by additional details of our investment results.

•Interest income increased by $33 million, or 7%, in 2022, compared with 2021. The average fixed-maturity pretax yield decreased by less than 1 basis point but was offset by a larger fixed-maturity portfolio that rose 7% on an average amortized cost basis. Interest income in 2021 increased by $22 million, compared with 2020, when that yield declined by approximately 1 basis point while the portfolio rose 8% on an amortized cost basis.

•Dividend income rose $29 million, or 12%, in 2022, after also rising 12% in 2021. Increases in dividend payment rates for most of the holdings in our common stock portfolio during both 2022 and 2021 drove the increases in dividend income. An increase in funds invested in that portfolio during both 2022 and 2021 also favorably affected dividend income.