Cincinnati Financial Corp (CINF) — Q4 2020 Earnings Call Transcript

Hello. This is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our conference call. Late yesterday, we issued a news release on our results along with our supplemental financial package, including our quarter-end investment portfolio. To find copies of any of these documents, please visit our investor website, cinfin.com/investors. The shortest route to the information is the quarterly results link in the navigation menu on the far left. On this call, you'll first hear from Chairman, President and Chief Executive Officer, Steve Johnston; and then from Chief Financial Officer, Mike Sewell. After their prepared remarks, investors participating on the call may ask questions. At that time, some responses may be made by others in the room with us, including Chief Investment Officer, Marty Hollenbeck; Cincinnati Insurance's Chief Insurance Officer, Steve Spray; Chief Claims Officer, Marc Schambow and Senior Vice President of Corporate Finance, Theresa Hoffer. Please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to these risks and uncertainties, we direct your attention to our news release and to our various filings with the SEC. Also, a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and therefore, is not reconciled to GAAP. Now I'll turn over the call to Steve.

Thank you, Dennis. Good morning, everyone, and thank you for joining us today. Everyone knows that this past year was full of challenges. We worked closely with the independent agents who represent us to react quickly to changing needs of their clients as the pandemic progressed and to keep business flowing. The communities we serve saw an unusually high level of catastrophe activity. While no one likes to witness the pain and destruction these events bring, it is when our field claims representatives shine, delivering support with empathy and warrant. Our headquarters associates remain focused on our key priorities even though they have had to adapt to working at home, balancing family and business responsibilities in new ways. Despite those challenges, our associates and agents responded with determination and focus, helping us to produce the healthy financial performance we reported today. Net income for the fourth quarter of 2020 rose 68% compared with the fourth quarter a year ago, including increases in the fair value of our equity security portfolio.

Thank you, Steve. And thanks to all of you for joining us today. The fourth quarter of 2020 included very good investment performance; investment income grew 2% and full year 2020 growth at 4% March 2019. Dividend income rose 7% for the fourth quarter. Net purchases for the equity portfolio during 2020 totaled $184 million. Interest income for our bond portfolio grew 2% on both a fourth quarter and full year basis. The pre-tax average yield was 4.11% for the fourth quarter, one basis point below the same period a year ago. The average pre-tax yield for purchased bonds during full year 2020 was 3.97% compared with 4.14% the prior year. We continue to invest in the fixed maturity portfolio with net purchases during the year totaling $291 million. Investment portfolio valuation changes for the fourth quarter of 2020 were again favorable for both our bond and stock portfolios. The overall net gain was just over $1.1 billion before tax effects, including $975 million for our equity portfolio, and $149 million for a bond portfolio.

Thank you, Mike. 2020 gave us ample opportunity to demonstrate our ingenuity and our flexibility. It's been a year we won't soon forget. And it's been a year that illustrated the strength of our company giving me great confidence in the future of Cincinnati Financial. As a reminder, Mike and I today are Steve Spray, Marc Schambow, Marty Hollenbeck, and Theresa Hoffer. Erica, please open the call for questions.

Yes, thanks. Good morning and congrats on the quarter. Sorry, if I missed this in the prepared remarks. The 90 basis points of pandemic losses and expenses in the quarter could you just provide some details on, the actual geography or what comprised of those reserves?

Yes. So related to the pandemic for the fourth quarter, we reported in total, it's going to be $13.4 million, which is 0.9 points on the estimated combined ratio. So related to that, $8 million was related to legal expenses to defend ourselves on the CIC policies that do not cover there. And then there was just a little over $3 million for Cincinnati Re, and then a little over $2 million for CGU. Those are the ones that have affirmative coverage. When you add all that up, the $8 million, $3 million, and $2 million is about $13 million. So it's about 0.9 on the combined ratio. If you want on a year-to-date basis, in total now, for the legal defense, that was $30 million that we had reported, and then for Cinci Re, it was $19 million, and for CGU it was just under $12 million.

Got it. Understood. These are small numbers, but how are you thinking about the ongoing nature of the pandemic, versus the affirmative coverage that you have from Cinci Re and Cinci Global? And the potential for any COVID charges to continue into next year?

That's a great question. And we watch this every quarter. Every quarter, as we close the books, we've got to nail the reserves as best we can. We go through a process with a lot of folks that are involved in estimating. In this case, there are really three camps. You've got the Cincinnati Global, the Cincinnati Re folks, and then you've got the CIC primary business side, which is primarily the claim side of the house, along with legal counsel, as they look at the number of claims that have been filed, the number of claims that are coming off, what are we doing, settling them quicker. There are just multiple factors that go into those estimates. And those estimates are redone each quarter. When you take a look at the Cincinnati Re side, the Cincinnati Global side, they're looking at the policies that they've written that have the affirmative coverage, they know which ones they have. They are monitoring those throughout the quarter and looking at, I'll say, case basis reserves on those and making their best picks. We are coming and reporting to the ultimate that we believe at the end of each quarter. That's a great question. Hopefully, I answered the question.

No, that's good. And just one more and I'll re-queue. Switching gears and thinking about new business. I saw in the earnings release that there was commentary that the new business premiums were down. In some ways that reflected increased competition with fewer policies at adequate pricing levels. At the same time, it feels like we're in this firming or firm or hard market, however you want to term it. But your renewal pricing is up mid-single digits. How do we reconcile this firming market that we're in versus the adequate pricing levels maybe not being where they need to be in some lines?

Hi Phil, it’s Steve Spray here. I would answer that with the fact that our industry is in such a dynamic environment. Some classes of business or segments that you see that hit the headlines as far as the firming market would be maybe in larger DNO policies, larger excess casualty policies, commercial property that would be catastrophe-exposed or cat-exposed coastal. Those are certainly hardening, and it just varies across industry segment and class. When you get into more mainstream business, we're looking at every single risk on a case-by-case basis. We're trying to determine an adequate price for that business, and I'd say our field underwriters, our agents are working through each of those accounts again, risk by risk, and just doing a great job. We've continued to see the metrics of our pricing on new business and renewals improve throughout the year. So I think that's part of it. Another part of it that I've gotten a lot of feedback from agencies and talked to enough of them is that one of the phenomena in a pandemic was just that fewer policyholders were going to market with their insurance. Typically, it was around there was no pain with the incumbent carrier. They weren't getting a large rate increase; they didn't have prior loss ratio problems or challenges. They might just be sitting tight for the year; they have other things to concern themselves with. So again, it really gets back to adequate pricing.

Understood. Thank you.

Thanks, Phil.

Yes, good morning. Maybe you can kind of talk to excellent underlying margins, again, this quarter. Curious if you and your colleagues are recognizing what we've been seeing as a more benign frequency trend in 2020, especially in personal lines. But speaking more to the commercial lines, I'm kind of curious if you've been reflecting some of that frequency benefit within the numbers.

Yes, Mike is Steve Johnston. We have seen improving trends. I think part of it comes from the ongoing effort that we've been doing. And Steve described in terms of our discipline, and pricing and underwriting what we're doing with the segmentation of risks, and using all the tools that we bring to the market, including our claims service and everything that all of our field representatives do. So we've seen ongoing improvement over time, pre-COVID in terms of our results. There's no doubt COVID and its impact on the economy have had some benefits. It's just hard to bifurcate between the two, how much you apply to one and how much you apply to the other. I think the key point is that we're well positioned as we go forward with our field force with all the expertise that we have as we look forward to appropriately pricing and writing risks in the future.

Okay, I understand that it's complicated. And there's a lot of moving parts, maybe ask a different way. Maybe you can give us some color on kind of what loss trend you're assuming on the more recent accident years? Is that a low single digit loss trend you're sticking with? And maybe that could give us more color?

I think the key point with the loss trend is that we are making its perspective. When we talk about a loss trend, we're always talking about what our estimate of the trend is going to be applicable prospectively in this perspective, rate rating policy period. We will be making a case for policies that will be effecting 2021 and beyond. When we think about trends, we think about everything that would affect loss costs, including what we're dealing with loss control, underwriting, and the segmentation of our book. That's the way we look at loss cost trends, not necessarily just this past year over the previous year, something historic. In regard to that, we do feel that the rates we are promulgating are in excess of the loss cost trends that we're estimating.

Okay, great. And one last question. I'll probably get back in the queue. Thanks for bringing up the Ohio Supreme Court regarding a key question. Can you remind us if that was accepted by the court and if there is a timeline we should consider?

No, that is still open to the court. They have not decided one way or the other on that yet.

Okay, so they haven't decided whether to see the question just to be clear, or is it open?

That's correct. They haven't decided one way or the other whether they will see the question. It's still in process.

Okay. Thank you very much.

Thank you, Mike.

Thanks, one really quick one on the BI if I can. Can you just say how much protection remains on your 2020 catastrophe reinsurance?

I'm trying to think if we used any on the derecho. It would have been just a little bit if we did. Maybe like in the 2, 3 million of the layer.

Okay, so that's fantastic. Bigger picture question, Steve. How much credibility are your actuaries using for loss experience in 2020, given how unusual the year was?

Yes, that's the balance between and I'm telling somebody that doesn't need to be told this. You're very knowledgeable. But it's just the balance that they're using between responsiveness and stability to the trends. They're looking at it in detail. It's not like one answer across the company as they do rate work and so forth. It's going on, by state, by coverage, by line, by year, and I think they're doing a good job of prudently reflecting responsiveness and stability. It's an experienced and talented group of actuaries. And I think again, to that key point of where we'll be prospectively regarding adequacy wise, I think we're going to be in good position.

Okay, fantastic. And then I know you've talked in the past about your comfort with the language in I guess the CIC policies? Are there any policy language changes planned for excess and surplus or CGU or on reinsurance to exclude communicable diseases?

I would say, on our Cincinnati Re, they have as they have renewed policies that we reinsure, there have been some changes. There be the one that comes to mind.

Okay, that's perfect. Thank you so much.

Thanks, Meyer.

Hi, good morning. Wonder if you could first talk about the 6% premium growth expectation you're discussing? Can you just kind of flush that out in terms of the areas that you might find most attractive on that? Is it going to be kind of similar to Q4, where you had the specialty reinsurance and E&S kind of driving that? Or how are you looking at that more by segment?

Yes, that's an overall number. I do think it's consistent with a continuation of what we've seen. We're obviously out there competing every day in the market, and as the market ebbs and flows and changes, it may change as we go out through the year. It reflects more of what you've seen with an emphasis on those that are a little bit slower to grow a little bit faster. Personal lines, in particular, has trended nicely here over the last quarter; of course, excess and surplus lines has been double digits. So yes, I think it's going to be not inconsistent with what we've seen.

Okay. And then, along those lines, on personal lines, and you mentioned in the press release to the significant growth you've seen in the high net worth business, which was up 25%. I was just wondering if you can talk about sort of the long-term opportunities there, and it does seem like it's becoming a bit more competitive environment there. But just your plans on you've come a long way with that, but your plans on scaling that up over kind of the next three to five years, geography, distribution, or just any other thoughts on that?

Sure, Scott. Yes, we're extremely pleased with what we're doing, not just in high net worth. A key point here is that our strategy has always been an agency strategy. We've got ourselves in a really good position with our agents. Historically, we were predominantly a middle market personal lines company, it's about a billion dollars of our billion and a half. Over the last seven years through expertise, product, service, you name it, we've grown that high net worth towards $500 million plus today. I think we're in a really good position, with sophisticated pricing tools that we have and the expertise that we've brought on board. We can, as we've always wanted to be just be the most important partner for our agents across the entire personalized segment. As far as expanding territories for high net worth, we've pretty much done that over the last five years. We've gotten into the territories where that business predominantly resides. I think we've got ourselves in a good position with our agents. They've shown a lot of confidence in us, obviously, with the growth. I think we've responded as we would expect with claims and our coverage forms and such. We feel good about the direction we're going with personal lines in general, both on pricing, profitability, and growth.

Okay, that's helpful detail. And then just the last one was on the reserve releases; they kind of returned to the sort of a run rate you saw in the first half of the year during the fourth quarter. I wanted to get a little more detail on two specific areas? The first is the commercial casualty, which saw about six points of releases. And then you had a modest reserve edition and homeowners of three points; just wondering if you could provide a little more detail on both those areas.

Yes, this is Mike. And thanks for the question. So yes, you're right. Overall for the year, 2.3 points were released. Overall, that was a little bit on the lower side; we've been running three to five points in any given year. The 2.3 points just overall is very similar to 2017 and 2014. Last year was probably a little bit on the higher end of the range; this year, a little on the lower end. Thinking about it on a year-to-date basis, we added reserves unfavorable was commercial auto, that was up $17 million. That was mainly due to some large losses in 2016. The encourage were coming in a little bit higher, so we adjusted the ultimate, looking back at that year. We also added a little bit on Cinci Re, and also on the surplus on the surplus INTNS that was 2016 and prior; primarily, that was coming in, Cinci Re, that was a little bit more of a current accident year. Related to commercial casualty, workers comp was actually seeing favorable development across several years. So when you take a look at that on a year-to-date basis, it was kind of evenly spread between accident year 19, 18, 17, and so forth. Not one specific item that made that jump up with that favorable development, but over the various accident years. As I said in my prepared comments, we follow a consistent approach, and we've got some of the greatest professionals that are coming up with the ultimate reserve pic. We'll follow their guidance.

Great question. Thank you.

Alright. Thank you.

Can you hear me?

Good morning, Fred.

Oh, hey, good morning. A couple of questions, forward-thinking income tax us with the new administration any possibility? And your thought, are you working on that? The other thing that concerns me regarding sharing automobiles here in California, I pay $0.50 a gallon tax to the state for road repairs. And I think the federal $0.17; my neighbor brought an electric car and is bragging that he doesn't have to pay any of that. Any thought on how that's going to be done? And is it going to affect the auto policies at all?

Fred, this is Mike. I'll take the first question. And then we'll let someone else pick up the second question. Yes, you're right; with the new administration there was a lot of talk before the election of which direction it would go in. When you look at Capitol Hill, and who's running what, we would suspect that there probably will be at some point tax changes that will be coming. We've heard things of 25%, 28%. What will it be? When will it be? We are looking at that and modeling it out. Over the years, tax rates have changed, and we've changed with it. We'll go with what comes at us and work to win.

Thank you.

I think on the cars, Fred, we're just continuing to look closely at those trends in terms of how the driving goes in California and in other states and how government policy interacts with that and be in a position to reflect it. Good question.

No, I appreciate it. Thank you so much. There's a lot of changes coming in. Thank you. I just want to say thank you, Jim Miller too.

Yes, thank you, Jim Miller. For those of you who don't know, he was our Chief Investment Officer and just passed away here in the last couple of weeks. He will be greatly missed by his family, the community, and the company. Thank you for mentioning that, Fred.

Thank you guys and gals. I appreciate you too. Gosh, I've been a shareholder since 1992. When the book value was below $28. It's hard to believe.

We appreciate your enthusiasm for our company, Fred.

Thank you guys and gals.

Thank you.

I'm through. Thank you.

Thank you, Erica. Thanks to all of you for joining us today. We look forward to speaking with you again on our first quarter 2021 call. Thank you and have a great day.