Cincinnati Financial Corp (CINF) — Q3 2025 Earnings Call Transcript

Hello. This is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our third quarter 2025 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 section near the middle of the Investor Overview page. 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 in 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, Marc Schambow; and Senior Vice President of Corporate Finance, Andy Schnell. 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 had an excellent quarter of operating performance and remain confident in the long-term direction and strategy of our insurance business. We also reported very strong investment income growth in the third quarter of this year, with ongoing benefits from rebalancing our investment portfolio in the second half of last year. Net income of $1.1 billion for the third quarter of 2025 included recognition of $675 million on an after-tax basis for the increase in fair value of equity securities still held. Non-GAAP operating income of $449 million for the third quarter more than doubled the third quarter from a year ago. Our 88.2% third quarter 2025 property casualty combined ratio improved by 9.2 percentage points compared with the third quarter last year, including a decrease of 9.3 points for catastrophe losses. The 84.7% accident year 2025 combined ratio before catastrophe losses for the third quarter improved by 2.1 percentage points compared with accident year 2024. Although the pace of growth slowed, our consolidated property casualty net written premiums still grew at a healthy 9% for the quarter. Our underwriters continue to emphasize pricing and risk segmentation on a policy-by-policy basis in their underwriting decisions. Estimated average renewal price increases for most lines of business during the third quarter were lower than the second quarter of 2025, but still at a level we believe was healthy. Commercial lines in total averaged increases in the mid-single-digit percentage range and excess and surplus lines was again in the high single-digit range. Our personal lines segment included homeowner in the low double-digit range and personal auto in the high single-digit range. Additional support for our premium growth objectives includes outstanding claim service and strong relationships with independent insurance agents who enthusiastically partner with us. Next, I'll highlight third quarter performance by insurance segment compared with a year ago. In addition to premium growth, underwriting profitability for each area was excellent. Commercial Lines grew net written premiums 5% with a 91.1% combined ratio that improved by 1.9 percentage points, including 2.8 points from lower catastrophe losses. Personal Lines grew net written premiums 14%, including growth in middle market accounts and Cincinnati Private Client. Its combined ratio was 88.2%, 22.1 percentage points better than last year, including a decrease of 19.5 points from lower catastrophe losses. Excess and surplus lines grew net written premiums 11% and produced a combined ratio of 89.8%, an improvement of 5.5 percentage points. Cincinnati Re and Cincinnati Global each had an outstanding quarter and continue to reflect our efforts to diversify risk and further improve income stability. Cincinnati Re, third quarter 2025 net written premiums decreased by 2%, primarily due to changing conditions in the property market. Its combined ratio was 80.8%. Cincinnati Global's combined ratio was 61.2%, along with premium growth of 6% as it continues to benefit from product expansion in recent years. Our life insurance subsidiary had another strong quarter, including 40% net income growth. In addition, term life insurance earned premiums grew 5%. I'll end my comments with a summary of our primary measure of long-term financial performance, the value creation ratio. Our VCR was 8.9% for the third quarter of 2025. Net income before investment gains or losses for the quarter contributed 3.1%. Higher overall valuation of our investment portfolio and other items contributed 5.8%. Now I'll turn it over to Chief Financial Officer, Mike Sewell, for additional insights regarding our financial performance.

Thank you, Steve, and thanks to all of you for joining us today. We reported growth of 14% in investment income in the third quarter of '25, reflecting efforts during 2024 to rebalance our investment portfolio in addition to strong cash flow from insurance operations. Bond interest income grew 21% and net purchases of fixed maturity securities totaled $232 million for the quarter and $944 million for the first 9 months of this year. The third quarter pretax average yield of 5.10% for the fixed maturity portfolio was up 30 basis points compared with last year. The average pretax yield for the total of purchased taxable and tax-exempt bonds during the third quarter of this year was 5.52%. Dividend income was up 1% and net purchases of equity securities totaled $57 million for the quarter and $118 million on a year-to-date basis. 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 $846 million for the equity portfolio and $242 million for the bond portfolio. At the end of the third quarter, the total investment portfolio net appreciated value was approximately $8.2 billion. The equity portfolio was in a net gain position of $8.4 billion, while the fixed maturity portfolio was in a net loss position of $217 million. Cash flow, in addition to higher bond yields, contributed to investment income growth. Cash flow from operating activities for the first 9 months of 2025 was $2.2 billion, up 8%. Turning to expense management. Our third quarter 2025 property casualty underwriting expense ratio decreased by 0.5 percentage points, primarily due to growth in earned premiums outpacing growth in expenses. For 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. We then updated estimated ultimate losses and loss expenses by accident year and line of business. For the first 9 months of 2025, our net addition to property casualty loss and loss expense reserves was $1.1 billion, including $900 million for the IBNR portion. During the third quarter, we experienced $22 million of property casualty net favorable reserve development on prior accident years that benefited the combined ratio by 0.9 percentage points. On an all-lines basis by accident year, net favorable reserve development for the first 9 months of '25 totaled $176 million, including favorable $236 million for '24, favorable $16 million for '23 and an unfavorable $76 million in aggregate for accident years prior to '23. I'll conclude my comments with capital management highlights. We paid $134 million in dividends to shareholders during the third quarter of 2025. During the quarter, we repurchased approximately 404,000 shares at an average price per share of $149.75. We believe both our financial flexibility and our financial strength are in excellent shape. Parent company cash and marketable securities at quarter-end was $5.5 billion. Debt to total capital remained under 10%. On October 10, we terminated our existing $300 million line of credit agreement that was set to expire on February 4, 2026 and entered into a new $400 million unsecured revolving credit agreement. This new agreement has a 5-year term with 2 optional 1-year extensions and is fully subscribed among our 4 lenders. Our quarter-end book value was a record high, $98.76 per share, with $15.4 billion of GAAP consolidated shareholders' equity, providing ample capacity for profitable growth of our insurance operations. Now I'll turn the call back over to Steve.

Thanks, Mike. I think this quarter's strong results demonstrate that we have the people and plans in place to keep building on our success. Our associates continue to answer the call for our agents and the communities they serve, building strong relationships and informing smart underwriting decisions. In September, Fitch Ratings recognized our decade of delivering profitability and growth by upgrading our insurer financial strength ratings for all of our standard market property casualty and life insurance subsidiaries to AA-, very strong from A+, all with a stable outlook. As our 75th anniversary celebration winds down, we are looking ahead to the future, and we are excited by the opportunities we see to keep living the golden rule, meeting the evolving needs of agents and policyholders and creating value for shareholders. I'll also note that Senior Vice President, Andy Schnell, is on the call and will be in future quarters. Following Theresa Hoffer's retirement, Andy joined Cincinnati Insurance 23 years ago and has worked his way up the accounting ranks, proving his business acumen and leadership abilities. He, Theresa and Mike, all worked closely over the past year to ensure a smooth transition that maintained our consistent accounting processes and procedures. As a reminder, with Andy, Mike, and me today are Steve Johnston, Steve Soloria and Marc Schambow. Chloe, please open the call for questions.

I wanted to begin with commercial auto and get into the details of what’s happening there for your team. You've taken some small measures regarding PYD for five consecutive quarters. How can we feel assured about the PYD charges even as your current picks are decreasing? Could you elaborate on that, please?

Yes, Mike, this is Steve Spray. I can start there. Let me talk about overall reserves because I think that's a question we want to address. We've seen over 30 years of favorable development across all lines. So far this year, we remain favorable, and this quarter is also looking good. We're noticing some fluctuations, but this quarter, commercial property and workers' compensation are performing well. On the other hand, commercial auto and casualty are experiencing some challenges from prior years. I feel reassured by the data showing that from 2020 onward, our initial estimates for each accident year have developed favorably as of September 30. Although there has been some variability with commercial auto by accident year, we have remained profitable in that segment over the past nine months. I believe our cautious and consistent approach, along with our dedicated team, positions us well to manage this line of business effectively.

Okay, Steve, I guess that's it. We've seen some companies take charges while others have not, but it seems more companies have taken charges than those that haven't. The decrease in your current picks raises some concerns that down the road, some of that could reverse and those prior year development charges could increase. Is there anything specific about commercial auto that worries you or that you think might be cause for concern?

Yes. The one thing I look at there, too is, as you know, Mike, we're a package underwriter, a package company, typically small to mid-market. We don't write a lot of transportation business. We don't have a big heavy auto fleet. And I think some of the challenges, especially with severity that you've seen in the industry over the last several years has really come from that segment. So just in the book itself, I've got confidence over the long-term. And especially, again, we're profitable in 2025 here, both for the quarter and for the full 9 months in commercial auto. I don't know, Mike, if you want to add something here.

Just to put that $10 million of unfavorable development into perspective, about $7 million of it was from accident year 2019 and 2020, which is a little older. Total reserves for commercial auto are approaching $1 billion. So when you put it all together, as Steve mentioned, we feel really good about where we are and with our reserving practices.

Okay. Yes. No, Mike. That's good insight. I guess the last question then is about the incurred loss details for commercial lines. There seems to be a rise in large losses, specifically those of $5 million and above, which looks significant compared to previous periods. Are you seeing any concerning trends with these large claims, or do you think this is just a temporary fluctuation?

This is Mike Sewell again. Let me quickly address that. For the current accident year, we saw about the same number of large losses overall. There were 44 new losses this year compared to 45 last year, meaning one less large loss. On a current accident year basis, however, the total is about $34 million higher than last year. This increase was mainly driven by commercial property, which was up $30 million, and homeowner losses, which rose by about $27 million. Conversely, commercial casualty saw a decrease of $12 million, as did other commercial lines. While there are some fluctuations in large losses, there hasn't been any indication of unexpected concentrations by risk category, geographic area, agency, or marketing territory. We expect some quarter-to-quarter volatility, but nothing particularly noteworthy to highlight.

Could you take Mike's question and insert general liability instead of commercial auto and maybe give us some thoughts there? Obviously, everyone is referring back to the selective bad quarter and their issues in both of those lines and it's fairly natural given that they've long referred to themselves as peers of yours.

Yes. Paul, I appreciate the question. Kind of what I was talking about before, where I get the confidence. One thing I would say, again, maybe kind of a bigger picture is I think it's well-documented across our country how legal system abuse is impacting all of us, including our industry, including Cincinnati Insurance. So that is certainly adding some pressure there. But again, let me go back to what gives me the confidence, and I'll specifically speak to casualty as well is just, again, a consistent process, we have consistent team, the overall all lines track record of 30-plus years of favorable development, again, favorable for the quarter, favorable for the full 9 months. And then the other data point that I was really paying attention to for this quarter is just again, if you look at each of the accident years from 2020 and forward, if you look at our initial pick for each of those accident years, it has developed favorably on an all-lines basis as of 9/30, and that holds true for casualty as well.

Fantastic. And then a completely different subject, actually got some questions this morning on the investment portfolio. Ordinarily, I never ask about this because the credit quality in the book has been extraordinarily high for a long time. But just kind of looking at a couple of months, it looks like there may be some subprime borrowers in there. And just curious if there's been any change in the credit quality profile and any thoughts that you have about, I guess, like PrimaLend or whatever you got in there that might be a little different than what you've historically seen in the bond portfolio.

Thanks, Paul. This is Steve. Overall, the strategy hasn't changed. Our focus has been more on the higher quality bond area. If we were involved in the high-yield area, it would be in the BBs. But for the most part, we're buying investment-grade quality bonds, attending to keep quality in the portfolio as opposed to reach for yield where we don't need to.

So the first question is just on the new business trends. And obviously, there's probably some price competition issues that are affecting some of your new business, but maybe you could speak to the results in the third quarter and what you think about new business going forward because it is a competitive marketplace.

Thank you, Greg. This is Steve Spray. I am very positive about the new business figures across all segments of our standard sectors as well as our E&S company. I generally avoid mentioning difficult comparisons with the previous year since it can sound like an excuse, but reflecting on 2024, I want to start with personal lines. For the past few years, we've been discussing this exceptional hard market in personal lines, with 2024 likely being its peak. Our company has leveraged its strong financial position and solid relationships with agents to capitalize on this opportunity and significantly boost new business growth. In fact, over the past 3.5 years, we have doubled our net written premiums in personal lines. The new business in this area remains robust, although California is having some impact. Still, the overall performance in personal lines is strong. The same goes for commercial lines, where new business figures are also impressive. While we face competitive pressures, our underwriters are effectively implementing our segmentation strategy without sacrificing long-term profitability for short-term growth. Overall, I am very pleased with our new business numbers in the current market, and I feel confident about our pricing and underwriting strategies. Regarding our E&S company, although there may be some pressure, I am comfortable with our new business performance and optimistic about our future growth as we appoint more agencies and enhance our capabilities.

Yes. You brought up in your answer California, and you also mentioned the once-in-a-generation hard market in personal lines. Given the events of the first quarter, the big fire loss in California, can you talk about how you're viewing California and the opportunity for growth in that state, whether it's E&S, personal or commercial or maybe even admitted as you think about the plans for 2026?

Yes, definitely. First, I want to highlight that we have excellent agents and policyholders in California, and our goal is to remain a stable and consistent market for them. Following the fire, we've conducted a thorough analysis of significant losses to extract lessons learned, and it’s evident that both we and the industry have adjusted our understanding of risk stemming from that event. Specifically, we are focusing on revising our modeling for conflagrations and sustained wind levels, which is providing us with a new perspective on risk aggregation. From my point of view, our pricing and terms for E&S were solid both pre-fire and post-fire, and I am very comfortable with our position. We are now concentrating on this updated view of aggregation and implementing our plans accordingly. Regarding your inquiry on E&S versus Admitted and commercial lines, as of December 31, 2024, 77% of our homeowner premiums in California were already underwritten on an E&S basis, and this figure is expected to increase. We have imposed some moratoriums on new business while we absorbed our lessons, but we have started to write new business in less aggregated areas. I anticipate that E&S will continue to represent a significant part of our operations in California moving forward. In terms of commercial lines, we are not currently active in California on an admitted basis; this means we haven't appointed agencies or have associates actively marketing admitted commercial products in the state. However, we did recently enter the California market for commercial E&S business, and early indications show that it is progressing well.

I guess related to that answer, just on California, you said that E&S is still a focus for you for personal lines. Do you have any view on the regulatory framework around the sustainable insurance mechanism that they're trying to roll out? I guess the fact that you're focused still on E&S suggests that you're somewhat skeptical or cautious about that, but just curious if you have a view on that initiative by the politicians and the Department of Insurance.

Yes, we are closely monitoring the situation and are actively collaborating with the California Department of Insurance. In regions where wildfire risk is minimal and where we do write admitted business, our auto and other coverages will be provided on an admitted basis. Homeowners insurance is mainly where you will encounter the excess and surplus lines. We are committed to working with the California DOI to achieve a mutually beneficial outcome for all parties involved. As I mentioned earlier, we have excellent agents and dedicated policyholders, and our claims team performed remarkably during the fires. The positive feedback we received from both agents and policyholders reaffirmed our efforts and the commitment we have upheld over the past 75 years. The situation in California exemplified our strengths in challenging times.

Circling back to the capital investment portfolio questions. Steve, you began by discussing the strength of investment income from the rebalancing last year. We can see that the equity markets have been extremely strong year-to-date, which has benefited you. I'm trying to understand if there is a specific ratio that would indicate the need for another rebalancing if the equity markets continue to rise. Additionally, has Cincinnati's view on excess capital changed at all in recent quarters?

Steve Soloria here. Regarding the equity portfolio, we have consistently managed and adjusted our positions based on growth in individual companies or sector exposures, in line with our investment policy. We are continually assessing this. The adjustments we made last year resulted from extensive internal discussions and numerous external factors influencing our decisions. Our initial decision to trim back was standard for us, but it expanded as we began considering external influences such as the forthcoming election, possible tax rate changes, and the effects on capital gains taxes. These external considerations led to a more significant adjustment. While I wouldn't rule out similar actions in the future, those external factors are not currently a concern. We will continue to manage at the individual security and industry level, trimming as necessary to maintain the portfolio. I will reserve the discussion about capital management for another audience.

Yes. Got it. I guess just sticking with excess capital in the U.S. portfolio. From the outside looking in a high level, Cincinnati would appear to have very large excess capital position. But would you not agree with that because the regulatory framework or your internal model would say, hey, you need to factor in a big equity market decline that stays there for a period of time. So you're really just effectively not holding excess because you want to have that money for potential worst times in the equity markets?

Thank you for your question. This is Mike Sewell. Our approach to capital management has not changed. We have five key ways to invest our capital, with our top priority being reinvestment in the business. We are maintaining sufficient capital to support growth, having discussed our strategies related to Cincinnati Re, CGU, California, and our E&S business. Reinvesting in the business remains our foremost capital allocation. While we also consider dividends to shareholders and buybacks, we are mindful of regulatory requirements to ensure we do not hold excessive equity securities, and we are currently well within those limits. I believe the strategy that Steve Solaria has implemented for the portfolio has been effective. This year's results have been very encouraging, and I am eager to see how we will utilize that capital to continue growing our business over the remainder of this year and into 2026, 2027, and beyond.

Got it. And lastly, moving to the commercial competitive environment, probably not E&S, let's just say, traditional standard commercial. A lot of questions fielded all around on kind of the cycle. No surprise, right? You talked about pricing power decelerating a bit sequentially. Should investors, I guess, be prepared for pricing to continue to decel on average in the coming years, just given the health of the industry and Cincinnati included? Or is there a dynamic on loss trend, right? You've got a lot of questions on casualty flare-ups and a little additions to reserves? Or is there a dynamic on loss cost trend that we're not appreciating that might kind of keep this cycle from looking like many previous soft cycles?

Yes, I appreciate that, Mike. Regarding the commercial standard and admitted business, I would say the market remains competitive but rational and stable. There are ongoing loss headwinds in our industry that affect the commercial segment, such as severe convective storms and general catastrophic losses. While the third quarter was light in terms of cat losses, looking at the full year reveals concerning trends with catastrophes. Issues like legal system abuse and social inflation continue to challenge us as an industry, and we are definitely attentive to that at Cincinnati Insurance. I believe we are still in a favorable rate environment. Specifically for Cincinnati, we consistently emphasize that we are underwriting and pricing risk on a case-by-case basis. Our upcoming risk evaluations are treated with careful consideration. While I won’t speculate for the entire industry, I can confirm that Cincinnati's net written premium growth for commercial lines was around 5%. In standard admitted commercial lines, we have achieved 13 consecutive years of underwriting profit. Our underwriters are collaborating effectively with our agents, implementing a segmentation strategy successfully. As our portfolio continues to perform well, it’s reasonable to conclude that the price adequacy of the portfolio is improving. We instruct our underwriters to address business that is inadequately priced while ensuring retention of business that is adequately priced. As the adequacy of our book continues to improve, and we implement our segmentation strategy effectively, we may see some pressure on the average net rate. Does that clarify things?

Yes. Yes, it does. I guess, we're all trying to figure out if others are also feeling like they've re-underwritten well enough to kind of do the same. But clearly, you guys are in a great position.

Yes, Mike, I want to emphasize that for us, this is not about re-underwriting. This is the strategy we have been implementing effectively for the past decade, and we intend to continue this approach going forward. Our focus is on prioritizing profit and maintaining stable, consistent financial strength for our agents and policyholders in the long term, which is achieved with a modest underwriting profit.

Obviously, the growth, even though it's decelerating, it's still better than most of your competitors. A lot of that is due to the significant increase in agency appointments and whatnot. Is there anything you can do to help us to sort of disaggregate how much of the growth is expansion into new agencies and how much is further penetration into the agencies you already have?

Yes, Josh, it's Steve again. I don't remember the exact figure regarding how much the new agency appointments have contributed to new business. However, I can tell you that we have a successful strategy for underwriting and collaborating with professional agencies. We identify and work with agencies that align with our goals and are intentional about broadening our distribution. We prioritize building strong relationships with these agencies. When we onboard an agency, the speed of their progress can vary. What matters to us is the quality of our relationship with them. To sum it up, this is a long-term initiative for us. While we may see some quarter-to-quarter growth from newly appointed agencies, our primary focus is on developing these relationships and ensuring alignment. We aim to provide each of these agencies what I refer to as the Cincinnati experience, and over time, the premium and growth will naturally follow.

The Cincinnati experience, I remember when I started covering the second, I think you had 1,600 agents. And in the last 9 months, you've appointed 355. Part of that experience was the direct relationship with the agents in a very intimate manner. At this level of growth, how are you maintaining that cultural part of what the Cincinnati agency experience used to be?

Yes, thanks, Josh. I believe it's all about perspective. You’re correct that we started with 1,600 agencies and we’re now around 2,300. Compared to our peers, we still hold a highly exclusive contract. Different agencies operate in various networks and have different influences. Even agencies in the same town handle distinct businesses. We have significant opportunities to further expand our distribution by appointing more agencies throughout the country without compromising our brand. The value of our brand, much like you mentioned with the Cincinnati experience, comes from our associates engaging directly with the community where agents regularly interact and make local decisions. This model can be replicated, and as we continue to add more agencies, we have observed our longstanding partnerships remain strong. In many instances, we are actually growing even further with those agencies. Additionally, we have recently partnered with another agency, gaining access to their business portfolio. We're proceeding thoughtfully in this process, as we have for 75 years by collaborating with professional agents, albeit at a slightly faster pace now.

Josh, let me just mention on Page 42 of our 10-Q, we do give some information on premiums by new appointed agencies in '25 and '24.

Great. I wanted to get a sense as to how you're thinking about catastrophe reinsurance for 2026. And I don't know whether that thought process has changed from early in the year when we had these very significant fire losses to more recent periods where catastrophes have been benign.

Yes, thank you, Meyer. This is Steve Spray again. We are currently in the midst of renewal season, particularly for property catastrophe coverage. To remind you, we currently retain $200 million on any individual catastrophic event and purchase 1.6 times that amount in coverage. While I cannot confirm specifics for January 1, 2026, as those decisions have not been finalized, I can assure you that we will maintain our consistent approach to acquiring property catastrophe coverage for balance sheet protection. We previously discussed our strong capital position. We believe in underwriting and pricing our own business and sharing in the losses. Over time, as we have expanded and improved our capital position, we have increased our retention and continued to purchase additional coverage for balance sheet protection. This philosophy and strategy will remain unchanged.

Thank you, Chloe, and thank you all for joining us today. We also look forward to speaking with you again on our fourth quarter call.