Cincinnati Financial Corporation (NASDAQ:CINF) Q3 2023 Earnings Call Transcript

Cincinnati Financial Corporation (NASDAQ:CINF) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Good morning, and welcome to the Cincinnati Financial Corporation Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Dennis McDaniel, Investor Relations Officer. Please go ahead.

Dennis McDaniel: Hello. This is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our third quarter 2023 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 we discuss 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.

Steven Johnston: Good morning, and thank you for joining us today to hear more about our results. We are pleased with our operating performance in the third quarter as we again saw improved underwriting ratios for almost every major line of business compared with the first half of this year. The net loss of $99 million for the third quarter of 2023 included recognition of $362 million on an after-tax basis for the reduction of fair value of equity securities still held. We continue to believe the value of our equity portfolio will increase over the long term. As of September 30, it had $5.6 billion in appreciated value. It decreased 8% during the third quarter but has increased 2% since the end of last year. Non-GAAP operating income of $261 million for the third quarter more than doubled last year’s $116 million, including a decrease of catastrophe losses of $58 million on an after-tax basis.

The 94.4% third quarter 2023 property casualty combined ratio was 9.5 percentage points better than the third quarter of last year, including a decrease of 4.8 points for catastrophe losses. Our 2023 ex-cat accident year combined ratios are also better than ’22, improving 3.4 percentage points for the third quarter and 1.7 points on a 9-month basis. Similar to last quarter, we also see signs of positive momentum in operating performance. Pricing segmentation by risk and significant average price increases contributed to the increase in our underlying profit combined with risk selection and other efforts to address elevated inflation effects on incurred losses. On a current accident year basis, measured at September 30, before catastrophe losses, our 2023 consolidated property casualty loss and loss expense ratio improved from 2022 by 4.3 percentage points on a case incurred basis.

For the same time period, we increased the incurred but not reported or IBNR component of the ratio by 3.0 points as we continue to recognize uncertainty regarding ultimate losses, remaining prudent in our reserve estimates until longer-term loss cost trends become more clear. Agencies appointed by Cincinnati Insurance are producing profitable business for us, working with associates who provide outstanding service to agents and their clients. Our underwriters are working diligently to retain profitable accounts while managing loans that we determine have inadequate pricing. They are also careful in selecting risks and pricing new business policies. Estimated average renewal price increases for the third quarter continued at a healthy pace.

Our Commercial Lines segment again averaged near the low end of the high single-digit percentage range, while our Excess and Surplus Lines Insurance segment continued in the high single-digit range. Personal Lines for the third quarter included auto rising to the low double-digit range and homeowner rising to the lower end of the high single-digit range. We reported 12% growth in consolidated property casualty net written premiums for the quarter. That included an 11% increase in third quarter renewal written premiums, reflecting higher levels of insured exposures in addition to price increases. Considering operating performance by insurance segment, I’ll comment on premium growth and how profitability is improving compared to a year ago. Commercial Lines grew net written premiums 5% in the third quarter, reflecting pricing discipline.

For example, lower written premiums this year for workers’ compensation and commercial umbrella together reduced the third quarter 2023 growth rate for total Commercial Lines by 2 percentage points. The Commercial Lines combined ratio improved by 3.8 percentage points despite an increase of 2.2 points from higher catastrophe losses. Personal Lines grew net written premiums 29% with growth in middle market accounts in addition to Cincinnati Private Client business for our agencies high net worth clients. The combined ratio was 4.6 percentage points better than last year, including 2.0 points for lower catastrophe losses. Excess and Surplus Lines improved its combined ratio by 3.4 percentage points and continue to grow profitably with net written premiums up 6%.

Both Cincinnati Re and Cincinnati Global, again enhanced our overall combined ratio and continue to demonstrate risk diversification benefits. Cincinnati Re’s combined ratio for the third quarter of 2023 was an excellent 81.0% with net written premiums essentially matching last year’s third quarter. Casualty premiums again decreased as we saw fewer attractive opportunities in certain segments of the market. Property premiums increased 24%, largely due to higher pricing while specialty premiums increased 31% due to attractive opportunities in pricing. Cincinnati Global’s combined ratio was an excellent 79.5% while reporting strong growth with net written premiums up 21%. Our life insurance subsidiary again performed well, with third quarter 2023 net income up 9% and term life insurance earned premiums growing 2%.

I’ll conclude with our primary measure of long-term financial performance, the value creation ratio. While our VCR on a 9-month basis is 4.4%, our third quarter 2023 VCR was negative 2.6%. Net income before investment gains or losses for the quarter contributed positive 2.4%, lower valuation of our investment portfolio and other items contributed negative 5.0%. Next, Chief Financial Officer, Mike Sewell, will add his commentary about our financial performance.

Michael Sewell: Thank you, Steve, and thanks to all of you for joining us today. Investment income again contributed nicely to improved operating results, growing 17% for the third quarter 2023 compared with the third quarter of 2022. Dividend income was up 5% for the quarter, in part due to net equity security purchases for the first 9 months of 2023, that totaled $89 million. Bond interest income continued to show strong growth, up 19% for the third quarter of this year. We added more fixed maturity securities to our investment portfolio with net purchases totaling just over $1 billion for the first 9 months of the year. The third quarter pretax average yield of 4.44% for the fixed maturity portfolio rose 36 basis points compared with last year.

The average pretax yield for the total of purchased taxable and tax-exempt bonds during the third quarter for 2023 was 6.4%. Valuation changes in aggregate for the third quarter of 2023 were unfavorable for both our equity and bond portfolios. Before tax effects, the net loss was $463 million for the equity portfolio and $369 million for the bond portfolio. At the end of the quarter, total investment portfolio net appreciated value was approximately $4.4 billion. The equity portfolio was in a net gain position of $5.6 billion while the fixed maturity portfolio was in a net loss position of $1.2 billion. Cash flow continued to boost investment income, adding to the benefit of rising bond yields, cash flow from operating activities for the first 9 months of 2023 was nearly $1.5 billion, up $54 million from a year ago.

We always strive for our expense management efforts to strike an appropriate balance between controlling expenses and making strategic investments in our business. The third quarter 2023 property casualty underwriting expense ratio was 0.6 percentage points higher than last year, primarily due to an increase in associate and travel-related expenses. On a 9-month basis, it was 0.4 points lower. Moving on to loss reserves. Our approach consistently 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 and an updated estimated ultimate losses and losses expenses by accident year in line of business.

For the first 3 quarters of 2023, our net addition to property casualty loss and loss expense reserves was $655 million, including $539 million for the IBNR portion. During the third quarter, we experienced $53 million of property casualty net favorable reserve development on prior accident years that benefited the combined ratio by 2.7 percentage points. On an all lines basis by accident year, net reserve development for the first 9 months of 2023 included favorable $123 million for 2022, $7 million for 2021, $72 million for 2020 and $11 million in aggregate for accident years prior to 2020. In terms of capital management, we also have a consistent long-term approach. During the third quarter of 2023, we paid $115 million in dividends to shareholders.

We did not repurchase any shares. Our assessment of our financial flexibility and our financial strength is that both are in excellent condition. As usual, I’ll conclude with a summary of third quarter contributions to book value per share. They represent the main drivers of our value creation ratio. Property casualty underwriting increased book value by $0.56. Life insurance operations increased book value, $0.73. Investment income, other than life insurance and net of noninsurance items added $1.04. Net investment gains and losses for the fixed income portfolio decreased book value by $1.86. Net investment gains and losses for the equity portfolio decreased book value by $2.33. And, we declared $0.75 per share in dividends to shareholders.

The net effect was a book value decrease of $2.61 per share during the third quarter to $67.72 per share. Now I’ll turn the call back over to Steve.

Steven Johnston: Thanks, Mike. I’m proud of the way our associates continue to help the independent agents who represent Cincinnati Insurance navigate this challenging market. We’re sticking to our fundamentals, listening, offering solutions and building strong relationships. Because our field associates live in the communities our agents serve, we see and respond quickly to market pressures most impacting them. We are then able to find solutions that contribute to our agent success, leading to long-term shareholder value. As a reminder, with Mike and me today are Steve Spray, Steve Soloria, Marc Schambow and Theresa Hoffer. Gary, please open the call for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question is from Greg Peters with Raymond James.

Charles Peters: Can we start off with — in your press release, you’ve talked about the 193 new agent appointments this year. How long does it take them once they’ve been pointed to get up to some minimum levels of premium on a per agent basis? Or put it another way, what’s sort of the production targets you have in mind when you appoint the new agents. And can you just clarify the comments of the agents that are just doing Personal Lines only?

Stephen Spray: Yes, Greg, this is Steve Spray. It really depends agency by agency. One thing I think as a company, we’ve always prided ourselves on as we do business with the best independent agents out there. And we are very deliberate about the agencies we appoint. We spend a lot of time kind of making sure that it’s a fit for both us and the agency. So when we go into a relationship, we feel pretty confident that we’re aligned and that the future will bear fruit. It just depends on the size of the agency, maybe the state and community but over time, we are the #1 or #2 carrier as measured by premium volume in the majority of the agencies we do business with for at least 5 years or more. So that gives you a little — just a little flavor of the trajectory that we have. And so it just depends but we don’t want to be just in consequential — inconsequential player in any agency.

Charles Peters: And the percentage of — I think you called out in the press release, a chunk of those were Personal Lines only. Was that geographically focused? Or can you add some color on that?

Stephen Spray: Yes, sure, Greg. Sorry, you asked that. Typically, Personal Lines only agencies will be private client or high net worth focused agencies to where maybe as an example, let’s say, in the state of California, we’re not active there for Commercial Lines right now. So if we make an agency appointment in California would be Personal Lines only, and it would be high net worth or private client-focused.

Charles Peters: Got it. All right. I guess pivoting to the commercial lines side of the business. If we look at new business trends in your commercial, it’s kind of flattish the last couple of quarters. And by the way, we’ve heard some other carriers talk about pockets of increased competition. Maybe you can give us some perspective inside your book of commercial, where you’re seeing some headwinds from competition and where you’re seeing some opportunities?

Stephen Spray: Yes. Again, Steve Spray, Greg. It’s that new business that you’re pointing to is all around underwriting discipline and pricing segmentation and just discipline from our field underwriters on the pricing front. So it’s a very competitive — it’s always a competitive market, and it varies by state. It varies by territory on who we’re competing with. But we have just — over the years, our proven model, appointing the best agents, assigning field associates to those agencies, making decisions locally, that has served us really well over the long fall. In the last 10 years, the pricing precision, the pricing segmentation, the tools that we have, have really been what’s driving quite frankly, the profitability that you see that we’re producing and our new business underwriters working with our agents out in the field are executing on that disciplined strategy.

And it’s to put pressure candidly, it’s put some pressure on the new business this year. But I can tell you each quarter of this year, is that commercial market has gotten a little more disrupted, we are seeing more and more opportunities at the underwriting terms, conditions, quality and pricing that we feel are adequate.