Cincinnati Financial Corp (CINF) — Q1 2024 Earnings Call Transcript

Hello, this is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our first quarter 2024 earnings 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 and Chief Executive Officer, Steve Johnston; and then from Executive Vice President and 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 President Steve Spray; Chief Investment Officer, Steve Soloria; and Cincinnati Insurance's Chief Claims Officer, Marc Schambow; and Senior Vice President of Corporate Finance, Theresa Hoffer. First, 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 the call over to Steve.

Good morning, and thank you for joining us today to hear more about our results. In short, we are off to a great start. Our first-quarter results reflect the success of our initiatives to continue balancing the profit and growth of our insurance operations coupled with strong investment income. Net income of $755 million for the first quarter of 2024 included recognition of $484 million on an after-tax basis for the increase in fair value of equity securities still held, representing about three-quarters of the increase in net income. Strong operating results generated the rest of the increase. Non-GAAP operating income of $272 million for the first quarter nearly doubled last year's $141 million, including a decrease in catastrophe losses of $93 million on an after-tax basis. The 93.6% first quarter 2024 property casualty combined ratio was 7.1 points better than the first quarter of last year, including a decrease of 6.9 points for catastrophe losses. While our combined ratio for accident year 2024 before catastrophe losses was a percentage point higher than accident year 2023 at three months, if we exclude Cincinnati Re and Cincinnati Global, the ratio improved by 1 point. Accident year 2024 also improved on a case incurred basis. However, we increased incurred but not reported or IBNR reserves as we continue to recognize uncertainty regarding ultimate losses and remain prudent in our reserve estimates until longer-term loss cost trends become more clear. We are also pleased with other measures indicating good momentum in our operating performance. Another quarter of pricing segmentation by risk plus average price increases helped to improve our underwriting profitability, combining with careful risk selection and other efforts to address elevated inflation effects on incurred losses. Agencies representing Cincinnati Insurance, supported by our experienced and professional associates produced another quarter of profitable business for us. Our underwriters continue to emphasize retaining profitable accounts and managing ones that we determine have inadequate pricing based on our risk selection and pricing expertise. Estimated average renewal price increases for the first quarter continued at a healthy pace with commercial lines near the low-end of the high single-digit percentage range, excess and surplus lines in the high single-digit range. Personal auto in the low double-digit range and homeowner in the high single-digit range. Our consolidated property casualty net written premiums grew 11% for the quarter with what we believe was a nice mix of new business and renewals. I'll briefly review operating performance by the insurance segment, highlighting premium growth and improved profitability compared to a year-ago. Commercial lines grew net written premiums 7% in the first quarter with a 96.5% combined ratio that improved by 3.9 percentage points, including 4.2 points from lower catastrophe losses. Personal lines grew net written premiums 33%, including growth in middle-market accounts in addition to private client business for our agency's high-net-worth clients. Its combined ratio was a very profitable 93.9%, 18.6 percentage points better than last year, including 15.9 points from lower catastrophe losses. Excess and surplus lines also produced a profitable combined ratio of 91.9%, rising 2 percentage points from the first quarter a year-ago, along with net written premium growth of 7%. Both Cincinnati Re and Cincinnati Global continue to produce significant underwriting profit, reflecting our efforts to diversify risk and further improve income stability. Cincinnati Re's combined ratio for the first quarter of 2024 was an excellent 78.6%. That includes IBNR that we routinely carry for expected losses from reinsurance treaties. We believe our potential exposure for losses from the Baltimore bridge collapse is immaterial. Cincinnati Re's net written premiums decreased by 12% overall, driven by a shifting casualty portfolio mix in response to changing market conditions. Property and specialty premiums increased due to attractive opportunities in pricing. Cincinnati Global's combined ratio was also excellent at 69.8%, and they again reported strong growth with net written premiums up 28%. Our life insurance subsidiary continued its strong performance, including first quarter 2024 net income of $19 million and operating income growth of 17%. Term life insurance earned premiums grew 2%. I'll conclude with our primary measure of long-term financial performance to value-creation ratio. Our first quarter 2024 DCR was a strong 5.9%. Net income before investment gains or losses for the quarter contributed 2.3%, and higher overall valuation of our investment portfolio and other items contributed 3.6%. Next, Chief Financial Officer, Mike Sewell, will add comments to highlight other parts of our financial performance.

Thank you, Steve, and thanks for all of you for joining us today. Investment income growth continued at a strong pace, up 17% for the first quarter 2024 compared with the first quarter of 2023. Dividend income was up 9% for the quarter despite net equity security sales for the first three months of 2024 that totaled $40 million. Bond interest income grew 21% for the first quarter of this year. We continue to add more fixed maturity securities to our investment portfolio with net purchases totaling $374 million for the first three months of the year. The first quarter pre-tax average yield of 4.65% for the fixed maturity portfolio was up 40 basis points compared with last year. The average pre-tax yield for the total of purchased taxable and tax-exempt bonds during the first quarter of 2024 was 5.79%. Valuation changes in aggregate for the first quarter 2024 were favorable for our equity portfolio and unfavorable for our bond portfolio. Before tax effects, the net gain was $602 million for the equity portfolio, partially offset by a net loss of $65 million for the bond portfolio. At the end of the quarter, total investment portfolio net appreciated value was approximately $6.6 billion. The equity portfolio was in a net gain position of $7.2 billion, while the fixed maturity portfolio was in a net loss position of $625 million. Cash flow continued to benefit from investment income in addition to higher bond yields. Cash flow from operating activities for the first three months of 2024 was $353 million, up 41% from a year ago. Our expense management objectives include an appropriate balance between controlling expenses and making strategic investments in our business. The first quarter 2024 property casualty underwriting expense ratio was 0.7 percentage points higher than last year, primarily related to higher levels of profit-sharing commissions for agencies. Regarding loss reserves, our approach remains consistent and aims for net amounts in the upper half of the actuarially estimated range of net loss and loss expense reserves. As we do each quarter, we consider new information such as paid losses and case reserves. Then we updated estimated ultimate losses and loss expenses by accident year and line of business. For the first three months of 2024, our net addition to property casualty loss expense reserves was $233 million, including $272 million for the IBNR portion. During the first quarter, we experienced $100 million of property casualty net favorable reserve development on prior accident years that benefited the combined ratio by 5.0 percentage points. Almost every line of business had favorable development except for commercial casualty, which was unfavorable by just $254,000. We added reserves to several older prior accident years and reduced reserves for the three most recent accident years. On an all-lines basis by accident year, net reserve development for the first three months of 2024 included favorable $184 million for 2023, favorable $24 million for 2022, and an unfavorable $108 million in aggregate for accident years prior to 2022. The unfavorable amount reflects our slowing the release of IBNR reserves for those older accident years. I'll conclude my comments with capital management highlights, another area where we have a consistent long-term approach. We paid $116 million in dividends to shareholders during the first quarter of 2024. We also repurchased 680,000 shares at an average price per share of $109.89. We think our financial flexibility and our financial strength are both in excellent shape. Parent company cash and marketable securities at quarter-end was nearly $5 billion. Debt-to-total capital continued to be under 10%, and our quarter-end book value was a record high, $80.83 per share with $12.7 billion of GAAP consolidated shareholders' equity providing plenty of capacity for profitable growth of our insurance operations. Now, I'll turn the call back over to Steve.

Thank you, Mike. As we previously announced, this is my last conference call as CEO. Effective at our Annual Meeting of Shareholders next Saturday, President, Steve Spray will add the role of Chief Executive Officer. As I've mentioned before, Steve is the right person to build on our decade of profitable growth. He understands the importance of our agency-centered strategy and the unique advantages it brings. I'm confident in his abilities to bring innovative ideas together with the hallmarks of Cincinnati Insurance to create opportunities for shareholders, agents, and associates. I look forward to continuing to work with him as Chairman of the Board. As a reminder, with Mike and me today are Steve Spray, Steve Soloria, Marc Schambow, and Theresa Hoffer. Raghav, please open the call for questions.

Hi, thanks. Good morning. You gave some helpful color on your loss picks, but I'm curious, how should we think about your loss picks in commercial casualty? Have you made any changes to your view of loss trend just given the trajectory of the current accident year loss ratio and are you baking in additional caution? Should we expect you to hold a bit more of a buffer near-term given uncertainty?

Yes. We feel confident, Charlie, with the loss pick that we had, we are reflecting uncertainty. There's a lot of good going on in the commercial casualty with rates we feel exceeding our loss cost trends. However, for the first quarter, where there's additional uncertainty, we are recognizing that in our loss pick.

Got it. Thank you. Maybe in workers' comp, it looks like pricing took an incremental step down in your initial loss ticket higher too. Is there anything in that pick, I guess, beyond pricing being down more or I guess, are you seeing anything there?

So, we're just continuing to see the same trends that we have been seeing with rates under pressure there, but also strong performance historically from the line. We are though recognizing the uncertainty that it comes with the rate decreases with a little bit higher loss pick for the current year.

Okay. Thank you.

Thank you.

Thank you.

Hi, thanks. In the earnings release, you mentioned that the underlying loss ratio for commercial improved by 1 point, but noted it was excluding Cincinnati Re and Global. Could you explain why you pointed that out? What caused the significant increase in the underlying loss ratio for Cincinnati Re and Global?

Yes, I want to highlight that we have three segments commercialized, personalized, and exceeding surplus lines. To reach the consolidated figure, we also need to consider the other parts, which include Cincinnati Re and Cincinnati Global. Since the first three segments I mentioned have shown improvements, we noted those in the other segment. I want to stress that Cincinnati Re and Cincinnati Global are performing very well. We don't believe we have significant exposure to the bridge collapse in Baltimore. We have been positively shaping the Cincinnati Re book to reduce risk. The increase in attritional losses compared to the same quarter last year is due to a shift towards more pro-rata or proportional reinsurance, which carries lower risk margins but results in a higher attritional pick, leading to less volatility. This is reflected in Cincinnati Re, which reported a strong zero CATs for the quarter and a favorable development of 10.4 points compared to an adverse development of 7.7 points a year ago. Of the $14 million in favorable development we reported, about $13 million originated from 2023. With the combined ratio for 2023 at 77.7% and a strong 78.6% for the first quarter, the efforts in reshaping the book have been successful. The inception-to-date combined ratio at the end of 2022 was 101.2, and with those strong figures from both the full year of 2023 and the first quarter, our inception-to-date ratio is now at 94.5. The actions we’ve taken are yielding positive results, reflecting a less risky portfolio at this point, even though there's a higher pick in the current action year.

For Cincinnati Global, same thing, strong 69.8%. They have had three consecutive years now as a top quartile Lloyd's underwriter and while they've done that, they've been diversifying in terms of their footprint by product line, by geography, and they're also providing an additional avenue for access to Lloyd's for the agents that are appointed by CIC. So, a lot of positives at CGU reflected with strong results. And again, it's pretty tough at Lloyd's to be top quartile three years in a row the way they've done. Also this quarter, zero CATs versus 11.1 a year ago. And then the reserve development is favorable by 25.6 points this year versus adverse by 3.2 a year ago. So I think in both of those businesses, there's a ton of positive going on. And we've only pointed it out so that the math would be easier as you saw the consolidated CLD, the commercialized department, the personal lines and the excess and surplus, and then to add the other portion to get to the consolidated.

That's helpful information. So, given the changes in business mix and the situation with Cincinnati Re, should we consider that the underlying loss ratio might be somewhat higher structurally, but with less potential volatility in the overall combined ratio? Did you want to add anything, or should I move on to my next question?

No, please move on to the follow-up.

Thanks. Considering the commercial lines excluding Reinsurance and Global, you've been taking steps to add reserves or exercise caution in your selections due to the ongoing inflationary environment. Looking at the overall top line growth, particularly in commercial casualty where inflation has been higher than anticipated, the net premium written growth is still below your historical levels compared to the industry, but it has shown some improvement. Given that you are still in an environment where you seem to be increasing your IBNR, are you reaching a point where pricing conditions or the market atmosphere are encouraging a more aggressive approach, or is it still prudent to remain cautious regarding your top line growth?

So yes, I think that we can balance the two. I think we feel good about our growth, double-digit overall at 11%, really strong growth in Personal lines. And with each of our lines, we write it on a package basis for Commercial lines, and so there's going to be a little bit of variance between the different lines. But we think we are in a good place with our pricing, but we realize that you need to stick to adequate pricing. And you can't fall into a trap where if others are underpricing business that you follow that path. So we're going to maintain the discipline, charge the adequate rate on a risk by risk basis and we think that offers us plenty of opportunity to grow the company.

I have a quick follow-up and I may have asked this before. Regarding your commercial casualty in the US non-global and reinsurance portfolio, do you differentiate between very small commercial, mid-sized, and large businesses? I'm just curious if, now that you have had more time to assess the results, the inflationary issues you mentioned are stemming from specific parts of the business mix or if it’s something else.

Yes, I think we're doing a good job of pricing adequately in all those areas. I do think and I pointed out on the calls before, you really do have to pay close attention to the higher levels because there's a leveraged effect of inflation with every layer that you go up for a constant ground-up inflation rate, there'll be more or higher inflation with each layer as you go up because of the layer below inflating into the higher layer. But we've been on this for some time. We've got some really talented actuaries that are working with our larger risks, and we feel we were addressing it early-on from the beginning and that we're in a good position across the board.

Thanks for the color.

Thank you.

Thanks, good morning. Regarding personal auto, Steve, your earlier comments were quite similar to last quarter's pricing trends. There was a slight increase in the loss ratio. Can you remind us about your expectations for profitability in personal auto this year and when you anticipate pricing might peak and then begin to decrease? It seems that you are likely still over a 100% combined ratio. When do you foresee profitability in personal auto?

I think we're in a good position. Personal lines are being sold as packages. The first quarter for the current accident year was actually down slightly compared to the first quarter last year and remained fairly stable for the full year. We feel positive about the pricing we’ve secured in auto, home, and other lines, and we believe it will bring benefits. I think Steve has a bit more to add.

Yes, thanks for the question, Mike. I think one of the strengths that we have going and it's been a plan we've been executing on, continue to work on for the last several years. So it's nothing new. But I think it's adding value to the company and to our agents is that we've become a premium or premier writer for our agents both in the middle-market space and in the high-net-worth. And that gives us both product diversification as well as geographic diversification. High-net-worth, while we write it everywhere, tends to be maybe a little more focused in certain geographies. High-net-worth or private client is heavier on the property side. And then on the middle-market, we give geographic diversification as that book is primarily, I'll call it, a Midwestern, Southeastern part of the US book of business and it's heavier in auto. So we're getting one, being that much more important to each of our agents, being able to attract more of their business, but at the same time, get the diversification both geographically and by line of business.

Yes, I also believe that the history of personal lines is evident with the $795 million combined this year. Last year, we were just a bit over $100 million, and prior to 2023, we had been under $100 million for four consecutive years. Therefore, I think we have shown a consistent ability to effectively price personal lines across the board, as Steve mentioned.

I would like to mention that we have the E&S capability to offer solutions for our agents and their clients, which is now active in nine states. We feel very positive about the growth and momentum in all personal lines, and we are very optimistic about the future of personal lines.

Thank you. I have a question regarding commercial lines, specifically about some numbers. If further details are needed, I'm open to a follow-up. When I review your reported claim counts in your statutory data for other liability, there is a significant decrease for the 2023 accident year, more than what was seen in the 2020 accident year, which was related to COVID. I'm not sure if this is a data issue, but reported claim counts after 12 months are down 15% in other liability. Is this something you've observed or anticipated? Can you provide any insights on this? While paid losses haven't decreased, the reported claim counts for general liability are considerably lower at the 12-month mark.

Yes, they are. And I think that's very helpful in terms of the way we're underwriting the book. It is a severity issue that we're seeing there.

So you recognize the frequency is down significantly then for other liabilities, Steve?

Yes, we do.

Good morning, everyone. My first question is about growth in the commercial lines business because it appears you are having significant success in new business production. Could you provide some insights into how your quote to bind ratio is performing or share some parameters for us to consider? Given the results, we would anticipate increased competition at some point, but that doesn't seem to be reflected in your numbers.

Thanks for the question, Greg. Steve Spray here. If you remember, throughout 2023, especially at the beginning of the year, our new commercial lines business faced significant challenges, particularly during the first six months, and we saw a considerable decline compared to 2022. We focused on our underwriting terms and conditions and maintained pricing discipline during that period. While others may have had a different outlook on the risks, our new business struggled. However, during the latter half of 2023, we observed an improvement in our new business. We remained committed to our pricing and underwriting discipline through that time. The latter half of 2023 saw a notable increase in new business, and this positive trend has continued into 2024. As Steve mentioned, we are a package underwriter, assessing each risk on its own merits, and we leverage predictive analytics to price the business effectively for each major line and the overall account. I see growth potential for new business in commercial lines in 2024, but, as Steve stated, it is crucial that we maintain our discipline in underwriting and pricing to earn our business rather than simply buying it.

Yes, that makes sense. So another topic that's come up that you guys have talked about is the concept of a multi-year policy that I know you guys use in certain lines of business. Can you give us an update on where you are with the three-year policies, which lines of business and has it increased as a percentage of your total book, et cetera?

You may need to follow up on the percentage increase, Greg. However, the three-year policy is generally a key differentiator for us. We have been dedicated to this for many years and continue to be today. Writing three-year policies is even more advantageous now due to our sophisticated segment and pricing. When our underwriters quote a three-year policy, whether it is a new policy or a renewal, it's important to remember that around 75% of the premiums in our commercial lines are adjusted annually. The accounts transitioning from a three-year policy that are renewing, including commercial auto, commercial umbrella, and workers' compensation, are all adjusted each year. The property, general liability, crime, and marine policies are the only ones where the rate is guaranteed. Additionally, our three-year policy has a better loss ratio compared to our one-year policy. Our underwriters are skillfully working with our agents not only on the technical aspects of underwriting but also using their intuition to select the best business for the three-year package, and the positive results reflect that. We are committed to this approach, and our retention rates improve significantly with the three-year policies midway through their term. This enhances retention for agents as well as for us, and it is beneficial for expenses. Most importantly, it demonstrates to our agents and policyholders that we are a company focused on building long-term relationships. We are committed to the three-year policy, believing it gives us a competitive edge in the market.

Yes, regarding the percentage question, I believe this is the right time to utilize that more in the current market conditions. I was just wondering if we could discuss it further from a commercial perspective. That's what I had in mind when I was asking about percentages.

Yes. Okay. No, I got it. That makes total sense, Greg. Yes, wherever we feel like we can get the adequate price on account, we are wanting to use our three-year package policy.

Hi, everyone. Looking at the commercial casualty core loss ratio, just given that it's a bit higher than it ran in the latter part of last year as well as the commentary on increased IBNR, I was just curious if that's primarily driven by GL or excess casualty or if it's a mix of both this quarter. And I was just curious if you all could comment on how you're thinking about rate adequacy across both of those pieces of the book.

I think it's kind of across the board, Grace. I do think that higher pick is something that we would do in the first quarter. Typically, we have run the first quarter a little bit higher than the full year prior just due to the newness of the accident year, but we feel very good. We feel very good about the way that we are pricing the GL and really across the spectrum there, including the umbrella.

Thank you. And I guess on the commercial auto side, it looks like growth picked up a little bit this quarter. I was just wondering if that indicates that maybe you all are starting to add some additional units rather than just top line growth being primarily driven by rate. And just kind of curious on how you all are thinking about potential growth in that environment, just given that it has been such a challenging line for the industry for so long?

Thank you for your question, Grace. This is Steve Spray. It's a combination of factors. We are still in the process of assessing our commercial portfolio while simultaneously growing new business. As a package writer, we don't offer single-line auto insurance; any auto coverage we provide is part of a broader package. I'm confident about our pricing strategy in the commercial auto segment and the direction we're heading. If you remember, back in 2016 and 2017, we made significant changes to our commercial auto portfolio, focusing on risk selection and pricing, which put us in a strong position. Although inflation has posed challenges, I feel optimistic about our commercial auto book in terms of pricing and risk selection, and we aim to grow that segment alongside our package offerings, ensuring adequate pricing and addressing risks individually.

Thank you.

Thank you, Grace.

Thank you, Grace.

Great. Thanks so much. To go back to the Cincinnati Global and Reinsurance side of things, just I'm not sure I understand, when you talk about lower volatility, is that a function of less seasonality or less catastrophic exposure?

It would be less catastrophic exposure.

Okay, perfect. The second question sort of related. Can you talk about what you're seeing in terms of the year-over-year, I guess, trend or the observed claim inflation rate for commercial property, is that decelerating at all compared to last year?

I think we still see inflation. We look at so much on a risk-by-risk basis that I don't know that I have a good number for you across the board on what we're seeing with inflation. And it's been a sticky thing in the inflation rates on insurance-related items, building materials and wages and so forth have been higher than the general CPI. So we take a cautious view, but certainly the rate of the increase in the second derivatives has been slowing down.

Okay, perfect. That's very helpful. And Steve, congratulations and thanks for everything.

Well, thank you, Meyer. It's been great.

Thank you to everyone for their excellent questions and thank you for joining us today. We hope to see some of you at our shareholder meeting next Saturday, May 4 at the Cincinnati Financial Headquarters Office here. You're welcome to listen to our webcast of the meeting also available at cinfin.com/investors. Steve and Mike look forward to speaking with you again on our second quarter call.