Q1 2021 Cincinnati Financial Corp Earnings Call

And I. Thank you for your patience.

[music].

Yes.

Good day, and thank you for standing by you and welcome to the first quarter 2021 earnings conference call.

At this time all participants lines are in on the student only mode. After the speaker's presentation. There will be a question and answer session to ask a question drew and the session you'll need to press star one on your telephone. Please be advised that today's conference is being recorded.

You require any further assistance. Please press star zero and thank you I would now like to hand, the conference over to your Speaker today, Mr. Dennis Mcdaniel Investor Relations Officer. Please go ahead Sir.

Hello, This is Dennis Mcdaniel Cincinnati financial thank.

Thank you for joining us for our first quarter 2020 One earnings conference call.

Late yesterday, we issued a news release on our results along with our supplemental financial package and creating our quarter and investment portfolio.

To find copies of any of these documents. Please visit our investor website, <unk> Dot com slash investors.

And the shortest route to the information is the quarterly results link and and navigation menu on the far left.

I'll just call your first year from Chairman, President and Chief Executive Officer, Steve Johnston, and then from Chief Financial Officer, Mike Sewell.

After their prepared remarks investors participating on the call may ask questions.

At that time, some responses may be made by others and the room with us, including Chief Investment Officer, Marty Hollenbeck, and Cincinnati Insurance's, Chief Insurance Officer, Steve Spray Chief claims officer, Mark Shambaugh, 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 over the call to Steve.

Thank you Dennis good morning, and thank you for joining us today to hear more about our first quarter results.

We were pleased with operating performance and believe it reflects our proven strategy and careful execution as we seek to continue growing profitably over the long term.

Net income for the first quarter, 2020, one rose by $1.8 billion compared with the first quarter a year ago and included increases and the fair value of our equity security portfolio.

Non-GAAP operating income was up $85 million or <unk> 62 per cent for the quarter, despite higher catastrophe losses, reducing it on an after tax basis by $21 million more than last year.

On a 91, 2% property casualty combined ratio was seven three percentage points better than a year ago with elevated catastrophe losses, this year, causing an increase of 1.3 points.

The current accident year loss and loss expense ratio before catastrophe loss effects continued to improve and was two three percentage points better than the same quarter a year ago.

Our results continue to benefit from efforts to diversify risks by product lines, and geography, and likewise from segmentation of risks as we underwrite and price policies.

Well the economic effects of the pandemic and pricing discipline continue to slow commercial lines, new business premium growth. We believe we are growing our business profitably and our relationships with the independent agents, who represent us are as strong as ever.

Consolidated property casualty net written premiums rose, 12% and the first quarter of 2021, and we continue to see various indicators of good pricing and underwriting discipline.

Renewal pricing during the first quarter continued to be ahead of our estimate for perspective loss cost trends for each property casualty segment.

Our commercial and personal lines insurance segment again experienced mid single digit per cent range estimated average price increases while the excess and surplus lines insurance segment improved to the high single digit range.

The combined ratio for our commercial lines segment improved by 17, one percentage points compared with the first quarter a year ago, and we grew net written premiums by 5% with and ongoing emphasis on pricing segmentation on a policy by policy basis.

Our personal lines segment grew first quarter net written premiums by 6% with the high net worth portion of this segment continuing to progress as planned.

The combined ratio for personal lines was six eight percentage points higher than the first quarter a year ago with underlying improved performance offset by catastrophe losses that were nine one points higher.

Our excess and surplus line segment produced a 92% combined ratio and grew net written premiums by 16%.

Cincinnati re contributed to roughly half of our net written premium growth in the first quarter by taking advantage of improved pricing and the reinsurance market growing its premiums by $91 million.

Losses from winter freeze events hurt its results and caused a modest underwriting loss.

Cincinnati Global produced another nice underwriting profit and grew its net written premiums by 11%.

Our life insurance subsidiary reported first quarter net income at a satisfactory level and growth term life insurance earned premiums by 9%.

Before I close my prepared remarks, I'd like to mention one important update with respect to business interruption claims litigation.

Earlier this month, the Ohio Supreme Court agreed to answer the question certified to it by the Federal District Court that is does the general presence and the community. We're on surfaces that are premises of the novel Corona virus known as stars koby to constitute direct physical loss or damage to property.

Or does the presence on our premises they person and infected with COVID-19 constitute direct physical loss or damage to property at debt premises.

We appreciate the court's decision to hear our case, we believe resolving these questions of law at the state level will create a more efficient judicial process throughout Ohio benefiting all parties involved.

I'll conclude with the value creation ratio our primary measure of long term financial performance. Our VCR was $4 one per cent for the first quarter of 2021, including two two percentage points contributed by improved valuation of our investment portfolio.

Now, our Chief Financial Officer, Mike Sewell will add his comments regarding other important areas of our financial results.

Thank you, Steve and thanks to all of you for joining US today, our first quarter 2021 and investment performance was quite good as investment income grew 5% Div.

Dividend income rose, 9% for the first quarter and net purchases for the equity portfolio totaled $13 million.

Interest income from our bond portfolio grew 5% compared with the same quarter a year ago.

Pretax average yield was 414% up 10 basis points from the first quarter of last year.

The average pre tax yield for the total of purchase taxable and tax exempt bonds. During the first quarter was $3 seven 1%.

We continue to invest and the fixed maturity portfolio was net purchases during the first three months of the year totaling $137 million and.

Investment portfolio valuation changes for the first quarter of 2021 were favorable.

And for our stock portfolio, but unfavorable for our bond portfolio.

The overall net gain was $308 million before tax effects, including $491 million for our equity portfolio offsetting a decrease of $193 million for our bond portfolio.

We ended the quarter with total investment portfolio net appreciated value of approximately $6 3 billion, including $5 4 billion and our equity portfolio.

Cash flow continues to help boost investment income cash flow from operating activities for the first three months of 2021 was very strong and generated $354 million up a 112% from a year ago.

Expense management is always an important matter and we aim to balance strategic business investments with expense controls.

The first quarter 2021 and property casualty underwriting expense ratio was 3.0 percentage points lower than last year's first quarter.

The pandemic continued to cause lower spending for several items such as business travelers.

We expect some of those expenses could return to a more normal rate and future quarters as restrictions lift and people feel more comfortable meeting in person.

In terms of loss reserves, our consistent approach aims for net amounts and the upper half of the Actuarially estimated range of net loss and loss expense reserves during.

During the first quarter of 2021, we experienced a fair amount of property casualty net favorable development on prior accident years.

The combined ratio effect was seven four percentage points for the quarter were $110 million and was higher than a typical quarter.

Each quarter, we consider new information such as paid losses, and estimate ultimate losses and loss expenses by accident year and lines of business.

And as we obtain and study new data during the year, we update estimates as needed.

Our workers compensation lines of business, which represents 15% of our total gross property casualty loss and loss expense reserves at just over $1 billion at the end of the quarter had.

Had the largest amount of first quarter favorable net reserve development.

This line has the longest tail as claims can remain open for many years.

And while the amount of reserves released for any given accident year was relatively small the aggregate amount was $25 million.

On and all lines basis by accident year net reserve development for the first three months of the year was favorable by $82 million for 2020.

16.

$16 million for 2019, and $12 million and aggregate for accident years prior to 2019.

Regarding capital management, we continue to approach consistent with the past.

We believe that our financial strength and financial flexibility, we're in excellent shape at the end of the quarter.

During the first quarter, we repurchase approximately 284000 shares at an average price per share of a $100 and <unk> 48.

As I always do I'll end my prepared remarks, with a summary of the first quarter contributions to book value per share. They represent the main drivers of our value creation ratio.

Property casualty underwriting increased book value by 65.

Life insurance operations increased book value by <unk>.

Investment income other than on life insurance and reduced by non insurance items added 57.

Net investment gains and losses for the fixed income portfolio decreased book value per share by <unk> 94.

Net investment gains and losses for the equity portfolio increased book value.

By $2 41.

And we declared 63 per share and dividends to shareholders. The net.

Net effect was a book value increase of $2 12 per share during the first quarter to a record high $69 and <unk> 16 per share.

Now I'll turn the call back over to Steve.

Thank you Mike before we close I want to thank our associates for their continued focus and dedication while still balancing serving customers and ever changing pandemic conditions. Our claims associates both in the field and at headquarters worked together to deliver our hallmark of fair and empathetic claim service to the many Paul.

And as the holders impacted by severe winter weather over the past few months.

We've continued to release, new products and services, creating additional ways to help the independent agents, who represent us grow profitably and offer value to their clients.

Overwhelming claim service layered on top of industry, leading products and services generates a pipeline and future opportunity we.

We remain optimistic about our long term prospects as we stay focused on executing our strategy.

As a reminder, with Mike and me today are Steve spray, Mark Shambo, Marty Hollenbeck, and Theresa Hoffer Patricia.

Patricia Please open the call for questions.

Yes.

Thank you.

And as a reminder to ask a question. Please press star one on your telephone and on that.

Sorry, and one on your telephone.

Phosphate a moment on the Q&A roster.

Your first question comes from the line of Mark Dwelle from RBC Capital. Your line is open.

Yes, good morning.

And emotions.

I was hoping you could talk through a little bit more detail related to the.

The prior reserve release related to the catastrophe events.

Like 2020 events or do they go back further than that very unusual to have such a large on a large adjustment for cats.

Hey, that's a great question and I appreciate it and.

Was it does seem a little high so it was two points and total for the prior year development.

The largest really when you when you look at what's coming through on our primary business related to 2020 cats, but it was widespread there was at least 10 cats and there where we had $1 million to $2 million favorable adjustments and then there was many other smaller items that with bill.

Low.

The $1 million range. When you also look at the <unk>.

There was it was really concentrated around three items. The first one was delta that was in 2020 that was about a $5 million favorable adjustment salary that was also in 2020 that was a $3 million adjustment and then I think it was the previous year. There was the Australia wildfires and that was $2 million. So when you add it all.

It's about $30 million and nurture two points.

Verbal development on cats.

I see so ultimately this was this was more about like.

As you said almost a dozen smaller adjustments rather than one big adjustment, where you kind of.

And it's called it or something.

And that's exactly right Mark you hit it. Thank you that's great question.

Okay.

On the second question that I had.

Related to the <unk>.

The sizable level of growth in Cincinnati re.

And again Thats, a fairly new business units I'm, not really used to what.

It doesn't have a lot of your growth historical run rate data. So I guess I'm curious two things one is kind of where you saw opportunity that prompted such a large.

Kris and writing and then maybe maybe thinking a little bit longer term.

How you think about that business and how large that business might be.

Relative to <unk>.

And I was going to be smaller than the core business, but how large would you suppose that could eventually become.

Yes, Mark Good question. This is Steve and Steve Johnston, we have two studies here.

Basically the short answer is we just have a talented team there thats well connected and they're supported by great financial strength here of the organization that just.

Had the opportunity to take advantage of firming prices firming conditions.

And it is and allocated capital model.

Foremost Cincinnati re it's written on the Cincinnati Insurance company.

Paper, it's got the full strength of our balance sheet and what we ask is that they just opportunistically try to estimate how much capital day.

And would need for each contracted day and are into and if we can hit the hurdle rate and if it can be.

Diversified the way, we and we wanted to be then we want them to grow.

If things would turn and go and the other direction and that's an area, where it could turn and go and the other direction in terms of a variety of <unk>, if the market would turn but and this quarter really across the board.

Cincinnati re had opportunity to take advantage of firming prices and improving terms and conditions and to grow the way they did.

This is the growth primarily in property oriented lines or was it casualty oriented or maybe a mix.

It was across the board it may be and have been a little bit more casualty and specialty.

But it was it was across the board, where we saw opportunity for.

Good pricing and.

Fair terms and conditions.

Okay.

And then I guess my last question.

And you really just and you commented a little bit on the opening remarks, but.

Just in terms of.

On the market conditions, the pricing behavior that youre seeing.

I mean would you characterize the pricing environment as continuing to improve or is it beginning to stabilize a little bit debt well, it's still at positive pricing levels.

Yes, you are right as we mentioned in the and the prepared remarks, we do feel that we're getting rate. That's ahead of loss cost trends and I think.

What's important and is that we are looking at this policy by policy.

Coverage by coverage state by state.

More of a ground up approach and at the top down approach and.

We still we see a consistent pricing environment.

And I have heard some industry comments that it might be tapering off a little bit but.

If you look back through history, our increases may have been a little bit.

Less than others over that period of time, I think that's driven a lot by mix and.

All the details that I described and we're just taking our steady approach forward that we think is appreciated by our by our.

Agents and their clients and.

And getting fair and adequate pricing risk by risk policy by policy.

Do you think your multiyear policies approach do you think that that that enhances your ability to capture rate as the market moves or does it does it inhibited.

Well, it's a steadily a steadying influence mark I think as rates go up.

We will have prices that are and positioned for three years same when they go down day retention is very high on the three year policies and.

We just think that stable.

As long term approach to relationships with our agents and their their customers is a winning formula that's proven to work well force for decades really.

And.

And we think we can manage it with the experience we have and it in terms of.

Pricing appropriately for the three year contracts.

Okay. Thanks, great. Thanks for the answers.

And there's no.

Thank you Mark.

Thank you again, if you would like to ask a question. Please press star one on your telephone.

There are no further questions at this time I would now like to turn the call free back to Mr. Johnston. Please go ahead Sir.

Well, thank you Patricia and thank you for joining US today, we hope some of you will join us for our virtual shareholder meeting on Saturday May eight at 930, a M. Eastern while we intend to resume in person meetings at some point and the future for now virtual meetings are the best way to keep shareholders agents and associates safe. Please visit www.

<unk> Dot <unk> dot com for details on how to register for the meeting we look forward to speaking with you again on our second quarter call. Thank you and have a great day.

This concludes today's conference call and thank you for participating you may now disconnect.

Okay.

[music].

Hum.

[music].

And last.

Yes.

Okay.

Yes.

Yes.

Yes.

And.

[music].

Yes.

Okay.

Okay.

Yes.

And then.

Yes.

Yes.

No.

Okay.

[music].

[music].

[music].