Cincinnati Financial Corp (CINF) — Q3 2024 Earnings Call Transcript

Hello. This is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our third 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, investors.cinfin.com. 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 President and Chief Executive Officer Steve Spray, 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 Executive Chairman, Steve Johnston, Chief Investment Officer, Steve Soloria, and Cincinnati Insurance's Chief Claims Officer, Mark Schambow, and Senior Vice President of Corporate Finance, Teresa Hopper. 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.

Good morning, and thank you for joining us today to hear more about our results. We are pleased with our operating performance for the third quarter and first nine months of the year. Several metrics show the progress we are making as we work to provide value to shareholders over time and to deliver outstanding service to agencies and their clients through our dedicated associates. Our combined ratio continues to improve, absent the volatility caused by severe weather. While the devastation Hurricane Helene, in particular, inflicted on communities is heartbreaking, our claims associates are working tirelessly to deliver superior service with empathy and care. We had another quarter of strong premium growth, bolstered by improved pricing precision and risk segmentation by our underwriters on a policy-by-policy basis. In addition to another quarter with nice investment income growth, we executed investment portfolio rebalancing to a larger degree than a typical quarter. We believe that effort will produce both near-term and long-term financial benefits. Net income of $820 million for the third quarter of 2024 included recognition of $645 million on an after-tax basis for the increase in fair value of equity securities still held. Non-GAAP operating income of $224 million for the third quarter was down $37 million from a year ago, driven by an $86 million increase in after-tax catastrophe losses. Our 97.4% third quarter 2024 property casualty combined ratio was 3.0 percentage points higher than the third quarter of last year and included an increase of 3.9 points for catastrophe losses. Our 86.8% accident year 2024 combined ratio before catastrophe losses improved by 0.9 percentage points compared with accident year 2023 for the third quarter and was 0.8 points better on a nine-month basis. We had another quarter of what we believe is profitable premium growth. Agencies representing Cincinnati Insurance again produced a robust amount of new business for us, and we continue to appoint agencies where we identify appropriate expansion opportunities. Our underwriters use pricing segmentation by risk, plus average price increases along with careful risk selection to help improve our underwriting profitability. Estimated average renewal price increases for the third quarter improved incrementally compared with the second quarter of this year. Commercial lines moved a little higher in this high single-digit percentage range, and excess and surplus lines remained in the high single-digit range. Our personal line segment also moved a little higher, with personal auto in the low double-digit range and homeowner in the high single-digit range. Our consolidated property casualty net written premiums grew 17% for the quarter, including 16% growth in agency renewal premiums and 30% in new business premiums. As I next comment on performance by insurance segment, I'll focus on third quarter premium growth and underwriting profitability compared with a year ago. Commercial lines grew net written premiums 11%, with an excellent 93.0% combined ratio that improved by 2.2 percentage points, including 1.3 points from lower catastrophe losses. Personal lines grew net written premiums 29%, including growth in middle market accounts and Cincinnati private client business for our agency's high-net-worth clients. Its combined ratio was 110.3%, 10.4 percentage points higher than last year, driven by an increase of 12.7 points from higher catastrophe losses. Excess and surplus lines grew net written premiums 23%, with a combined ratio of 95.3%. While that's still quite profitable, it's less so than a year ago due to higher catastrophe losses and a modest amount of unfavorable reserve development on prior accident years. Both Cincinnati REIT and Cincinnati Global were again profitable and continue to reflect our efforts to diversify risk and further improve income stability. Cincinnati REIT grew third quarter 2024 net written premiums 5% and had a 95.6% combined ratio, bringing its nine-month combined ratio to a very profitable 81.5%. The $38 million of catastrophe losses Cincinnati REIT reported for the quarter included approximately $19 million for Hurricane Helene. Cincinnati Global's combined ratio was an outstanding 66.6% for the third quarter, with 12% growth in net written premiums. Our life insurance subsidiary had another profitable quarter, including net income of $20 million and term life insurance earned premium growth of 4%. Before I close my prepared remarks, I'd like to briefly comment on the estimated effects of Hurricane Milton on fourth quarter results. While it is still early, we estimate our pre-tax incurred losses will total between $75 million and $125 million, net of any applicable reinsurance recoveries. Catastrophe losses for direct business written by the Cincinnati Insurance Company represent less than $15 million of that estimate while Cincinnati REIT represents more than half. Now, I'll conclude as usual with our primary measure of long-term financial performance, the value creation ratio. Our third quarter 2024 VCR was 9.0%, bringing the nine-month total to an excellent 17.8%. Net income before investment gains or losses for the quarter contributed 1.7%, higher overall valuation of our investment portfolio and other items contributed 7.3%. Next, Chief Financial Officer Mike Sewell will highlight some additional aspects of our financial performance.

Thank you, Steve, and thanks to all of you for joining us today. Investment income had another round of strong growth, up 15% for the third quarter of ‘24, compared with the same quarter in ‘23. Dividend income was down 1%, reflecting $959 million of net sales of equity securities during the third quarter, primarily from some portfolio rebalancing through trimming or exiting positions of seven common stocks among our 63 holdings at the beginning of the quarter. As Steve mentioned in our news release, this does not represent a change in our investment approach of holding a significant amount of equities as we work to balance near-term income generation with long-term book value growth. The large cash balance generated during the third quarter has been reduced and should continue to decline with additional bond purchases during the remainder of the year. Bond interest income grew 21% for the third quarter of this year. Net purchases of fixed maturity securities totaled $672 million for the quarter and $1.4 billion for the first nine months of the year. The third quarter pre-tax average yield of 4.8% for the fixed maturity portfolio was up 36 basis points compared with last year. The average pre-tax yield for the total of purchased taxable and tax-exempt bonds during the third quarter of this year was 5.53%. Valuation changes in aggregate for the third quarter were favorable for both our equity portfolio and our bond portfolio. Before tax effects, the net gain was $841 million for the equity portfolio and $411 million for the bond portfolio. At the end of the third quarter, the total investment portfolio net appreciated value was approximately $7.3 billion. The equity portfolio was in a net gain position of $7.5 billion, while the fixed maturity portfolio was in a net loss position of $203 million. Cash flow, in addition to higher bond yields, again boosted investment income growth. Cash flow from operating activities for the first nine months of 2024 reached $2 billion, up 36% from a year ago. I'll briefly comment on expense management and our efforts to balance expense control with strategic business investments. The third quarter 2024 property casualty underlying expense ratio decrease of 0.2 percentage points was largely due to lower levels of profit-sharing commissions for agencies. Moving on to 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 nine months of 2024, our net addition to property casualty loss and loss expense reserves was $963 million, including $917 million for the IBNR portion. During the third quarter, we experienced $71 million of property casualty net favorable reserve development on prior accident years that benefited the combined ratio by 3.2 percentage points. For commercial casualty line of business, there was no material reserve development for any prior accident year during the quarter. On an all lines basis by accident year, net reserve development for the first nine months of ‘24 included favorable $326 million for ‘23, favorable $55 million for ‘22, favorable $10 million for ‘21, and an unfavorable $180 million in aggregate for accident years prior to ‘21. My final comments pertain to capital management. During the first nine months of 2024, we returned capital to shareholders through $365 million of dividends paid and nearly 1.1 million shares repurchased at an average price of approximately $112 per share. Earlier this month, another dividend was paid, returning another $120 million to shareholders. That payment completed the company's 64th consecutive year of increasing shareholder dividends, a streak we believe is matched by only seven other publicly traded companies based in the United States. We believe our financial flexibility and our financial strength are both in stellar condition. Parent company cash and marketable securities at quarter end exceeded $5 billion. Debt to total capital remained under 10%. And our quarter end book value was at a record high, $88.32 per share with nearly $14 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.

Thanks, Mike. The momentum we have right now is powerful. As we put the finishing touches on department plans for next year, you can feel the excitement and see the opportunities that lie ahead in all corners of the company. Agents echo that feeling as they comment on their appreciation for our ability to deliver stability, consistency, and financial strength, giving them a first-class carrier to support their most well-managed accounts. Last week, Fitch Ratings Agency agreed, affirming our current financial strength ratings and revising our outlook to positive from stable based on our sustained track record of profitability and proven financial strength. As a reminder, with Mike and me today are Steve Johnston, Steve Soloria, Mark Schambow, and Teresa Hopper. Betsy, please open the call for questions.

Thanks. Michael Phillips from Oppenheimer. I appreciate it. Thanks for the time, and good morning, everybody. I want to start with the commercial casualty. Steve, you mentioned no material favorable PYB there. Last quarter, you had a little bit, and the recent action years are favorable. I say as a backdrop because if you look at the current action year there, it's up a bit. In commercial casualty, it's up almost 6 points, and I kind of want to drill into what's driving that? You say in the Q that for commercial lines total, there's more IBNR. It looks like that might be the case for some other lines, but if we can kind of do back of the envelope, the higher loss pick for commercial casualty, it seems like it might be more paid activity. I want to see if you can confirm that and maybe what else might be going on in commercial casualty? Thank you.

Yes, thanks, Mike. Mike Sewell is going to go ahead and tackle this, and then I may add some commentary at the end.

No, I appreciate it, and thanks for the question. So, yes, as you already noted, there was no prior accident year that had a material development during this quarter. So, in recent quarters, we've added to or we've slowed the release of IBNR reserves as we've reacted to loss payments and case reserve increases that were higher than expected for some accident years related to the commercial casualty line. There have been some higher case incurred losses that were spread across several accident years that were more severity than frequency. But, as you're probably looking at page 9 of the supplement and you're seeing the loss pick being elevated a little bit, it's really, Mike, it's just related to prudent case reserves or prudent reserves that we're adding. There's a lot of uncertainty there. You're seeing a lot of things in the industry that's out there. If I were to take a look at the nine-month compared to nine-month for that loss pick, you're really only about two full points higher. We are adding to the IBNR you've seen that on page 11 of the supplement, and you'll see that the commercial casualty is the largest area that we're adding IBNR. So, that's probably a lot of information, but yes, that's the background. Thank you.

Okay, thanks. I guess if we stick with that line for a second, Steve, your opening comments didn't seem like there was much of a change in commentary on renewed price changes, and yet this line saw a pretty good jump in premium growth. I'm so curious what's driving that and how we should think about the commercial casualty going forward with top-line growth?

Yes, Mike, the pricing remains strong. I would emphasize the uncertainty surrounding social inflation and legal system abuses, but overall uncertainty is important to note. Our approach is that we operate as a package writer and do not engage in monoline business. Our underwriters, whether in the field or at headquarters, are addressing each account individually, utilizing both traditional underwriting practices and data-driven insights. We see an opportunity to segment our portfolio using advanced pricing tools, suggesting that there is still potential for rate increases across most lines of business, particularly in general liability and umbrella, with the exception of workers' compensation. Currently, we've reported high single-digit growth in casualty, but it's crucial to look beyond that average as it doesn't reflect the entire picture. A significant portion of our portfolio is priced adequately, while there are other segments where we see a need for higher rates.

Okay. Thank you. I'll follow up in a bit. Thanks so much.

Okay. Thanks. I guess this is a quick follow-up to the last question and answer on playing offense in commercial casualty, and I could see commercial auto, too. Is it my understanding correctly that you're clearly playing more offense and feel better even despite the loss ratio in those two lines being booked at not ideal levels because you're just being more conservative in your picks like you have historically, and so as the years unfold, hopefully that conservatism comes back in a good way through reserve releases over time? Am I thinking about it correctly?

Yes, this is Steve again. Let me address that and then I welcome your follow-up. Overall, we're optimistic about our pricing. Our primary focus is on future pricing or rating periods, and we feel confident about our pricing strategy and the team executing it. We assess this carefully on a state-by-state basis and by the specific risks and lines of business. I would say we are definitely taking an offensive approach. We have $13.8 billion of GAAP equity to support over $9 billion in premiums, which positions us strongly. Our strong relationships with our agents allow us to maintain regular communication, and we consistently receive positive feedback regarding our stability, consistency, and financial strength. We're taking an offensive stance across all segments and lines of business. I often mention this during our one-on-one investor meetings, but we have a proven track record and business model, as well as a strong field focus and claims handling that further support our efforts. Over the past 12 to 13 years, the major factor that has boosted our confidence in taking an offensive strategy has been the pricing sophistication and segmentation we have implemented for more than a decade. Coupled with the team that leverages those predictive models, I have tremendous confidence in our ability to grow through all market cycles. In Personal Lines, as I have noted before, we are experiencing a unique market opportunity. Our excess catastrophe performance continues to improve. However, we need to be mindful that we must cover catastrophe losses with real funds. Last year, Personal Lines reported a 100.4 combined ratio, but in the previous four years, amidst increasing catastrophe challenges, we maintained an underwriting profit. Overall, I feel confident about all lines of business and segments. I hope that clarifies your question.

Yes. Honestly, if you're seeing a much better loss ratio in some of those lines, perhaps the stock would be up today, but I'm not sure how much people would believe that. It seems you're being conservative, which makes sense. Shifting topics, regarding the significant sell-down of the investment portfolio, are you saying that there are no real changes due to Steve's new leadership? Or are you indicating that if we calculate equities as a percentage of shareholders' equity XOCI, we're operating well above historic levels, so you're trimming? Is that the correct way to understand it? Will you continue to trim to achieve a lower ratio?

Mike, I'll tackle the first part of that. I can tell you that there is absolutely no change in our philosophy because of a new CEO. But I'll let Steve Soloria kind of dive into the details there for you.

Mike, this is Steve Soloria. I agree with your perspective. We consider this as standard prudent portfolio management. We aimed to be opportunistic by periodically trimming or pruning certain holdings for various reasons, in line with our investment policy statement and by evaluating stocks based on their fundamentals. We believed that selling in a strong equity market for some names that had appreciated was a suitably opportunistic move. As we evaluated where to reinvest those funds, we considered the best opportunities, whether it was shifting back into a robust market or capitalizing on the potential closure of the window for higher interest rates. Thus, we began reallocating strategically. Additionally, we assessed the tax implications and the effects of realizing gains to balance out some losses. This situation was influenced by multiple factors, which led us to our level of activity. However, this trimming is routine for us on a quarterly basis, and we anticipate returning to a more normalized level of activity.

Okay. That's helpful, Steve. And may be lastly, switching to the excess and surplus lines segment. Just focusing specifically on the top-line growth acceleration trend in recent quarters. I know there's historically been plenty of top-line volatility in this segment, too, and it's a smaller segment, but is there a trend line we should be thinking of or something changing? Or I'm not saying we're going to run rate 23% top-line growth. But I'm just curious if there's something underlying that we should be appreciating? Thanks.

Thank you, Mike. Nothing is changing in that regard. We're operating at about 90% casualty in our E&S space. There can be some inherent variability or volatility in E&S, both in terms of premiums and losses. Losing a larger account can put pressure on net written premium quarter to quarter. However, I would summarize it this way: we're focused on maintaining 12 years of underwriting profit in our E&S company. We approach reserving prudently across the entire company and are prepared to act when necessary. Regarding growth, I believe we are in a favorable environment, and I think we can expand our E&S company in various conditions. We're still just beginning to explore the potential of our excess and surplus lines.

Is it worth elaborating on why do you think you discern the surface? Is it just you, over time, get more data and can expand your underwriting appetite or hiring more folks or trying to understand that thing?

Yes, that’s a great follow-up. I believe it’s a combination of factors. We are continuously enhancing our expertise, growing our team, and expanding the range of products we consider. We are also bringing on more agencies across the entire company, which positively affects our E&S operations. When examining the business our agents handle in the E&S sector, we see significant opportunities. Our business model is attractive because we work directly with retail agents, operate our own in-house brokerage, and can pass more compensation directly to our agents. We manage billing and claims internally as well. Overall, I think we have a solid model that we can keep expanding.

Good morning, everyone. So kind of, I guess, building a little bit on Mike's question, but more importantly, some comments that you made talking about the generational opportunities for growth, I think, in personal lines. Can you give us some perspective on your view on what used to be when you're throwing all the new business on the 'new business penalty' and attended both personal lines and commercial lines? Can you give us a sense of how the profile business has changed over the last couple of years? Or is it a geographic change or just some color on how the company is changing as it grows?

Yes, that book of business has definitely evolved. Ten years ago, we were predominantly focused on middle-market personal lines, comprising about 90% of our business. Now, that segment has expanded significantly, and we are just under 60% in high net worth or private client lines. The reason I refer to this as a once-in-a-lifetime opportunity is due to various macro factors affecting the middle market, particularly severe weather events in the Midwest. Inflation has also had a significant impact. Our traditional competitors in that sector appear to be facing disruptions, and our strong balance sheet has allowed us to capitalize on these opportunities. One of our main strengths in personal lines today, as indicated by our agents, is that we are regarded as a premier market in both high net worth and middle market segments. Our deep relationships with agencies enable us to provide valuable solutions across both segments effectively. Financially, this diversification is beneficial both by line of business and geography. High net worth or private client business is generally more focused on property, whereas middle market tends to lean more towards auto. We serve both types, with high net worth mostly located along the coasts and middle market primarily in the central U.S., giving us a balanced mix. Regarding pricing, I share the confidence I mentioned to Mike about commercial lines. We have a skilled team with extensive expertise in developing pricing models throughout the business. I don’t believe in a new business penalty; it's crucial to price every risk appropriately on a risk-adjusted basis. I am confident in our pricing strategy moving forward. I hope that helps clarify.

Yes, it does. I mean, you mentioned the opportunities with severe convective storms related to E&S. I think you are increasing your exposures in states like California, Texas, and Florida, and possibly in the Northeast compared to other regions. That's what I was considering because you mentioned your losses in Milton, which don't seem to be as significant as they could have been. Perhaps your exposures are concentrated in different parts of Florida?

Our new business in Personal Lines in Florida has decreased by just over $4 million compared to last year. I want to clarify that this isn't solely about pricing; especially in the middle market for properties exposed to severe convective storms, the terms and conditions are just as crucial. This includes aspects like wind, hail deductibles, actual cash value, or roof schedules. Regarding Excess & Surplus on the personal line side, our focus is primarily on California homes at the moment. We have our E&S operations established in over ten states, most of which are coastal. For instance, in Florida, we are still writing new business on an E&S basis, but we haven't found the pricing and terms attractive enough yet. Therefore, we will maintain a cautious approach in this area.

Fair enough. I just pivot to another company question on the agents. I view them as a critical strength of your company, the agent relationships. Can you talk to us as you look out to next year, what you think the growth of the agency force might look like or the appointments that you make in '25? Or do you have a target? Or how do you sort of approach that, please?

Yes. We are not disclosing our goals for agency growth next year. However, I can share that we are focused on expanding our distribution. We see significant opportunities without compromising our brand. My perspective is that the number of agencies we appoint will not dilute our franchise. Our priority is to maintain relationships with the most professional agencies that closely align with our business approach, which emphasizes efficient, fair, and local operations. The agency relationships are crucial to our success and are our competitive advantage. We will continue to prioritize local business dealings, which is a major focus for us. You can expect our distribution to expand at a similar pace to what we've seen this year and in the previous years.

Fair enough. Thank you for answering my questions.

Yes, absolutely. Thank you for the questions.

Hi. Thank you for taking my questions. I just have a question on E&S unfavorable development. I know it's pretty small, but I appreciate if you can add some colors on that.

Yes, I believe you were referring to the unfavorable development on the E&S casualty. I want to note that we observed case incurred losses emerging at amounts higher than we anticipated. As I mentioned before, this segment is primarily casualty, making it inherently volatile. However, we have a strong track record of profitability in our E&S company, and we will continue to exercise prudence with our reserves, just as we always have. That's all I have to add regarding the unfavorable developments for E&S this quarter.

Got it. Thank you. I have a follow-up on the personal auto and personal line. So the rate accelerated from high single digit to low double digit. Just curious about your view to reach rate adequacy. Do you think that you still need double digits for 2025 and beyond?

Yes. I can't provide you with a specific run rate, but I can say that we still have a significant amount of rate earning in the book. Considering everything we've discussed, especially the changing weather patterns, I believe there is still room for rate increases across the entire personal lines book. It's important for us to look at this from a forward-looking perspective, and we feel that our rates in personal lines are currently ahead of loss cost trends.

Got it. Thank you.

Hi, everyone. I realize these are smaller segments, but the core loss ratio ticked up quite a bit versus recent history in both other commercial and other personal. So I was hoping that you could kind of give us an update on what you're seeing there? And if there's any sort of intra-year movement in there? And if it's just kind of related to some of the comments you've heard across the industry on pressure on long-tail lines? Thank you.

Thank you, Grace. You mentioned the smaller premiums. There is a lot of inherent variability in those lines. For example, in personal lines, we see some impact from watercraft in our book. However, we regularly conduct in-depth reviews of every line of business, and there are no concerns regarding geographic, agency, or line of business issues. That's all I have to add on that, Grace.

Thank you. I have another question about commercial casualty. Historically, you've mentioned that the core loss ratio tends to be higher in the first quarter compared to the last three quarters of the year due to the uncertainty from the start of the accident year. I'm trying to better understand what you observed this quarter that caused Q3 to be higher than Q1. Additionally, I'm considering whether year-to-date numbers are the best indicator for future trends or if you could provide any insights on whether the Q3 level might represent a new baseline moving forward. Thank you.

Yes, Grace, you're absolutely right. Typically, every quarter as we gather more data and information, we refine our assessments further. What we are experiencing in commercial casualty is largely due to broader macroeconomic factors: rising litigation costs, an increase in claims leading to litigation, social inflation, misuse of the legal system, and third-party litigation funding. This situation is affecting the industry as a whole, which is why we're adopting a cautious approach in this area due to the ongoing uncertainty. We have over 30 years of positive development, achieved through a consistent process and ensuring our team takes swift action when we notice concerning trends. However, there isn’t anything specifically concerning in the third quarter except for the macro uncertainty we have mentioned.

Thank you.

Well, thank you all for joining us today. We look forward to speaking with you again on the fourth quarter call. I hope everybody has a nice weekend.