Q1 2022 Cincinnati Financial Corp Earnings Call

April 29, 2022

Yeah.

Thank you for standing by the conference will begin momentarily until such time, you will hear music. Thank you and please continue to standby.

[music].

Okay.

Thank you all for standing by and welcome to the <unk> first quarter 2022 earnings Conference call.

Please note that all lines will be in listen only mode until the question and answer session of today's conference.

Ask the question over the phone it by that time, you May press the star key followed by the number one please.

Please also note that today's call is being recorded.

Now turn the call over to your host Dennis Mcdaniel Investor Relations Officer, Sir you May now begin.

Hello, This is Dennis Mcdaniel at Cincinnati financial.

Thank you for joining us for our first quarter 2022 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, <unk> Dot com slash investors.

Shortest route to the information is the quarterly results link and then navigation menu on the far left.

On this call you'll first hear 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 in the room with us, including Chief investment Officer, Marty Hollenbeck and so.

Cincinnati insurance as President Steve spray.

<unk> 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 it over to call to Steve.

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

It was another quarter of good operating performance our agency focused strategy led to profitable growth and reflects well on the skill and dedication of our associates and excellent relationships with terrific independent agents.

We reported a net loss of $273 million for the quarter due to the recognition of a reduction in the fair value of securities held in our equity portfolio.

non-GAAP operating income for the first quarter of 2022 was up $31 million or 14% versus a year ago.

Our 89, 9% first quarter property casualty combined ratio was one three percentage points better than last year's first quarter.

The current accident year loss and loss expense ratio before catastrophe loss effects rose slightly compared with accident year 2021 measured at three months.

Reflecting an increase in large losses for our property lines of business.

We again managed our business to healthy levels of policy retention with meaningful average renewal price increases for each of our property casualty insurance segments.

Policy retention rates for both commercial and personal lines improved from a year ago to the upper 80% range.

Consolidated property casualty net written premiums rose, 12% for the first quarter 2022.

Our pricing segmentation efforts continue to support what we believe is profitable growth as our underwriters worked to retain and write more profitable accounts, while taking appropriate action on opportunities that we determined.

Quit pricing.

We also believe renewal pricing during the first quarter was again ahead of our estimate for perspective loss cost trends for each property casualty segment.

Our commercial lines insurance segment continued to experience estimated average renewal price increases in the mid single digit percentage range similar to the fourth quarter.

In the first quarter personal lines average renewal price increases slowed by a small amount compared to the fourth quarter remaining in the low single digit range.

Our excess and surplus lines insurance segment continued in the high single digit range.

Our commercial lines segment grew first quarter 2022, net written premiums by 8% with a combined ratio of 92, 3%.

Our personal lines segment.

Net written premium grew 11%, reflecting our continued planned expansion of high net worth business produced by our agencies.

The segments first year first quarter combined ratio of 83, 9% improved $17 two percentage points from a year ago, driven by lower catastrophe losses.

Our excess and surplus lines segment had an 85, 9% combined ratio and continued strong growth with first quarter 2022, net written premiums rising by 25%.

Cincinnati re and Cincinnati global each had a nice quarter with healthy growth.

Cincinnati re grew net written premiums by 30% for the first quarter 2022, with a combined ratio in the mid 90% range.

Cincinnati Global grew net written premiums by 24% with a combined ratio also in the mid 90% range.

Our life insurance subsidiary generated first quarter 2022, net income of $10 million matching last year's first quarter and grew term life insurance earned premiums by 6%.

I'll conclude with the value creation ratio, our primary measure of long term financial performance.

VCR was negative six 9% for the quarter, while net income before investment gains or losses contributed one nine percentage points lower investment valuations during the quarter resulted in the investment gains or losses component contributing negative eight six points.

Now, our Chief Financial Officer, Mike Sewell will highlight several other important aspects of our financial performance.

Thank you, Steve and thanks to all of you for joining us today.

Investment income again grew at a good pace up 6% for the first quarter of 2022 compared with the same period a year ago first quarter dividend income was up 12% and net equity securities purchased totaled $34 million.

Bond interest income grew 4% in the first quarter, while the pretax average yield of four 1% for the quarter was down 13 basis points from a year ago.

The average pre tax yield for the total of purchased taxable and tax exempt bonds during the first quarter 2022.

364%.

We again purchase additional fixed maturity securities with net purchases during the quarter totaling $109 million.

Valuation changes for investment portfolio during the first quarter of 2022 were unfavorable in aggregate for both our stock holdings and our bond holdings.

Dollars before tax effects, including a net decrease of $746 million for unrealized gains in our bond portfolio.

At the end of the first quarter total investment portfolio net appreciated value was approximately $6 6 billion, including $46 million for our bond portfolio.

Cash flow again helped to grow investment income cash flow from operating activities for the first quarter 2022 generated $198 million compared.

Compared to $354 million a year ago.

Balancing strategic investments in our business with expense containment initiatives continues to be a priority.

The first quarter 2022 property casualty underwriting expense ratio was two two percentage points higher than last year.

Most of the increase was from higher accruals for profit sharing commissions for agencies and related expenses.

Regarding loss reserves, we aim for a consistent approach by targeting net amounts in the upper half of the Actuarially estimated range of net loss and loss expense reserves.

As we do each quarter, we considered new information such as paid losses in case reserves, and then updated estimate ultimate losses and loss expenses by accident year and line of business.

During the first quarter 2022, we experienced $41 million of property casualty net favorable development on prior accident years have benefited the combined ratio by two five percentage points.

In recent years, we've experienced significant growth and commercial umbrella coverage within our commercial casualty lines of business, including 16% in 2021 is the industry pricing for umbrella has been strong.

Umbrella loss losses tend to be frequently relatively infrequent with high severity and we recently experienced an elevated level of large losses, particularly for accident year 2019.

Due to increased uncertainty for our umbrella business, we strengthened reserves for certain accident years and estimated ultimate losses for accident year 2022.

What we believe is a prudent level.

On an all lines basis by accident year net reserve development for the quarter was favorable by $46 million for 2021 $24 million for 2022.

Unfavorable by 2020 by $28 million for 2019, and unfavorable by $1 million in aggregate for accident years prior to 2019.

Now, let me turn to capital management.

We continue to follow a consistent approach that includes share repurchases as part of maintenance intended to offset the issuance of shares through equity compensation plans. However.

However, changing circumstances, our opportunities can influence us to repurchase more or less than historical averages.

We believe that our quarter end financial strength was excellent and provides ample financial flexibility.

During the first quarter of 2022, we repurchased 375000 shares at an average price per share of $120 five.

I'll conclude my prepared remarks, as I, usually do with a summary of 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 <unk> 81.

Life insurance operations increased book value six.

Investment income other than life insurance and net of non insurance items added 53.

Net investment gains and losses for the fixed income portfolio decreased book value per share by $3 67.

Net investment gains and losses for the equity portfolio decreased book value by $3 33.

And we declared a <unk> 69 per share in dividends to shareholders.

The net effect was a book value decrease of $6 29 per share during the first quarter to $75 43 per share and now I will turn the call back over to Steve.

Thank you Mike.

It's satisfying to see the steady execution of our initiatives producing these strong results.

March and April probably return of business travel and a return of our headquarters associates working together in person, it's wonderful to see so many familiar faces in the hallway and to be able to get out from behind our desk to visit with agents and our field teams across the country.

This return to a bit of normalcy is produced in energy you can feel across our organization.

Bringing with it lots of optimism for the future of Cincinnati financial.

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

Jesse Please open the call for questions.

Thank you speakers participants we will now begin the question and answer session. As a reminder to ask a question over the phone you May press the star key followed by the number one.

To withdraw your request you May press the pound key.

Again, Thats star one to ask a question or the pound key to withdraw your request.

Speakers. Our first question is from the line of Meyer Shields of <unk>. Your line is now open.

Thanks, I apologize if you covered this I didn't think I caught it but there seems to have been a lot of losses above $1 million million $5 million range.

Is that.

Inflation or is that just random noise or anything else.

Amir This is Stephen good question, we think it's more in the random noise category for this first quarter certainly inflation, we're keeping a close eye on and so forth, but it's.

One quarter it was largely in our property lines and we will continue to keep close eye on but we think it was more random noise and that it did.

Reflect about four points.

The current accident year.

When comparing it to that 9%.

Increase overall in the current accident year.

Okay. That's helpful second question.

<unk>.

We've been seeing I guess some level.

<unk> inflation, which is clearly, helping you get with workers' compensation premium.

Is it your sense that the impact on <unk>.

Claim costs for indemnity are in line with that or is there any disparity with how with the premium and the impact of higher wages.

Yes.

We're keeping a close eye on that as well because with payroll being the exposure basis for workers' compensation it should.

Help on on the premium side.

Also we've got the inflation I think our.

We feel confident in our workers' comp book.

Loss ratios have been rising as the competitive environment in the industry and CCI decreased rates, but we still feel.

Good in terms of what we've done in terms of really.

Working workers' compensation down as a percentage of our overall commercial premium.

But at the same time supporting agents.

On what we feel to be the best risks the most adequately.

Adequately priced risks.

Okay, Thanks, and if I can throw in one other real quick question one of the.

Competitors in the high net worth homeowners space have talked about double digit loss trend that match, what you're seeing in your book.

No I don't think we'd been seeing double digit loss trends.

Our book no.

Okay I'm all set thank you so much.

And we do feel good about the high net worth book.

Thank you mayor.

Thank you.

Speakers next question is from the line of Mark Dwelle RBC capital markets. Your line is now open.

Yes, good morning.

A few questions.

So.

They are kind of touched on it a little bit, but I guess.

The increase in the current accident year loss ratio in commercial lines segment.

Primarily attributable to the number of large losses in the quarter or is there more work beneath the surface there.

Yes, if we would break the commercial line segment down the current accident year rose by 1.2 points in the <unk>.

Fact of large losses on that was five one points.

So well more than.

The amount of the total increase in the current accident year.

Sure.

Yeah.

There must be some normalized kind of large loss load that would be kind of embedded in a normal combined ratio. So if I was to try to try to if you're if you're a large losses were more like normal.

Would there have been.

Two or three point improvement I guess in the accident year loss ratio kind of all else equal.

Yes, that's a good question.

I don't have the handy, we've got it but the over time, there, but I can tell you for.

The quarter of the first quarter here of 2022.

It was eight six points in total.

Large losses.

Over $1 million for the current accident year for the first quarter of.

2021, it was three five.

So that difference is the $5 one that I just mentioned so I you know I feel is it more of a feeling right now not.

Not having the numbers, but that three and a half seems more normal feels more normal.

Okay Mark.

Mark This is Oh I'm sorry go.

Go ahead.

This is Steve spray Mark I was just going to add that.

It is normal process for us Amit on any large losses.

We take a look at.

Risk category geography.

Policy inception date in <unk>.

<unk> your field marketing territory to see if we can see any trends or patterns and we have not and like Steve said, we feel it's it's one quarter.

And.

I think it's going to be more important to look at it over a longer period of time, but it is something that we absolutely watch on a regular basis.

Okay.

While we still have your Mark Dennis usually is quick to help me out with.

With the numbers and in terms of the.

The.

What we're seeing I can turn you to page 65 of our Q.

And.

Or is it.

I'm sorry, the K.

And there it is more I would say a little bit higher than what I said more in the.

4% range.

2021 was for the current accident year losses above a million four to three six for 2020.

And four 6% for 19.

And then we had another.

For that over $5 million, so that was in the range of $1 million to $5 million 189, and five respectively. So.

More than that.

Say five five and a half range.

For that.

Okay. That's helpful.

Definitely it helps clarify kind of what the.

Our normalized run rate might really look like.

The second question I know this is a little bit of a long shot but is there.

Do you have any exposure to the Russia, Ukraine conflict, either via the Cincinnati re or the Cincinnati Global book I know historically, you've written some aviation, but I didn't know if it was anything that that might be impacted.

Yes, it wouldnt be in aviation, but we have had.

A little bit of loss in <unk>, it's about $5 million.

So not a big amount to the organization.

And you know really Hearts go out to all the people there in Ukraine for the suffering this going on.

For Cincinnati re it's de Minimis in terms of of loss.

And.

We will continue to keep it keep an eye on it but about about $5 million for us for the quarter in total okay.

That's helpful and then.

Last question, I guess kind of related to the investment portfolio.

Do you have a sense of about how much of your portfolio.

Might mature and roll over the course of say the next 12 months through the balance of 'twenty. Two I'm really just trying to get a sense of kind of what portion of the fixed income portfolio. We will have the opportunity to renew at the relatively higher new money rates that we're all seeing right now.

Yes, Mark I do actually have that information. So this is looking.

The balance of 2022 about.

Four 4% of the portfolio of $23 six three.

2014.

Just eight and $25 93.

Book yields on that ranges from three seven.

Up to about four and a half or 2025.

Okay.

That's helpful. Those are all my questions. Thank you.

Thank you Mark.

Again participants its star one to ask a question over the phone or the pound key to withdraw your request.

Speakers. Your next question is from the line of John heading of Dowling and partners. Your line is now open.

Good morning, I had a question on your multi year policies in commercial how does that impact your ability to reprice for the inflation, we're seeing over the past.

Three to four months.

Yes, John Steve spray.

We're committed to that three year policy, we think it is important to.

Our agents and our policyholders.

Consistent with our.

Our desire to have long term relationships.

And so when we can get.

An adequate rate for the risk terms and conditions we are.

We're keen to offer three year policy on our commercial packages.

So you know on that too maybe to give you a more color what that does is it really locks in the rate for the property general liability the crime in the inland Marine coverages and.

I would say this to you to us every year, whether it be those policies that are renewing off of a three year or the coverages that are subject to annual adjustment about 75% of our commercial premiums are subject to an anniversary adjustment even with that three year policy.

Does that makes sense.

Yes, so essentially I have a three year rate, but I can adjust it for the change in in <unk>. So that would that would be an inflation adjustment on an annual basis.

Yes.

Yes, you could adjust it for inflation on <unk> and.

And right now we're running that in the high single digits and you also.

So your general liability, which would typically have.

Your exposure your pre.

<unk> are based off of gross sales or payroll as those increase.

Premium goes up it's just that the rate is locked in.

Yes.

Right, Okay, how much of your portfolio overall is multiyear if I just think of it.

In terms of net premium written in commercial.

Yes, it's about 60% of our policy count.

Okay.

Then the next question I had on on <unk>, and then with your new delegated authority into Lloyd's.

How much business is that MGA, putting through to your own syndicate versus.

Putting through to other syndicates at Lloyd's So I'm just trying to.

Get a sense for how big the.

That delegated authority business could be because obviously you have limited you have a limit on your capacity at Lloyds syndicate, but if youre writing elsewhere.

Would seem that you have a bigger underwriting capability at least for your agents.

Right sure John Good question, we're just with our first coverage that we are.

Handling through the delegated authority and it's a deductible by down and for that particular product and especially given us our first it will be for our syndicate as we look to future and rolling out additional coverages, we would open it up to partnerships with other syndicate over there.

Got it so I'm asking that a little bit.

Little bit too far in advance.

In terms of where you are.

And then finally, just one last kind of number numbers question.

E&S how much of.

E&S business is written.

With the standard insurance contract. So I'm, just trying to get a sense of how much your agents are leveraging that platform for.

The standard commercial product they are also offering.

Yes, John Steve spray about 50% of the time when our E&S company.

Wright's coverage.

<unk> insurance company.

Writes business on the standard side.

It's a high percentage, it's a high percentage, it's key to what we do.

It works really well for the agents.

I could get into a whole lot of detail, having the same claims rep, having actually having the same.

Resources at Cincinnati Insurance company.

For our agents for those policyholders, whether it's admitted or non admitted is a big big deal.

We're trying to do more and more of it and you can see with the growth and the profitability in CSU both have been extremely strong so when.

And we feel really good about where that is going forward.

And then the rest of the book there that's not wholesale market.

<unk> right, that's still giving retail agents.

Better access to the E&S market is my understanding correct.

That is correct that's exactly right.

CSU.

Our E&S carrier and our wholly owned subsidiary <unk>.

Brokerage C will be called C. Super only provides access to retail agents of Cincinnati insurance company to our non admitted.

Offering.

We do not.

Our in house brokerage does not place business and the broader E&S market I think that might have been part of your question at the end, it's only with our own non admitted carrier and only four licensed and appointed agents of Cincinnati Insurance company.

Right right Yeah, no I was getting at so the strategy is really geared towards making life easier for all your agents. It's just an agent centric strategy.

Absolutely everything we do.

Everything we do is agency centric.

That's it for me, thanks, guys and enjoy the weekend.

Thanks, Sean you too.

Thank you participants I'll now turn the call back over to Mr. Steven Johnston for final remarks.

Thank you Jessie and thanks to all you for joining US today, we hope to see some of you at our annual meeting of shareholders on Saturday May seven at the Cincinnati Art Museum.

Also welcome to listen to our webcast of the meeting available at Sinfin Dot Com Slash investors. We look forward to speaking with you again on our second quarter call have a great day.

Okay.

This concludes today's conference call. Thank you all for joining you may now disconnect.

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Thank you everyone.

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Thank you all for standing by and welcome to the C. I N S first quarter 2022 earnings conference call.

Please note that all lines will be in listen only mode until the question and answer session of today's conference.

To ask a question over the phone it by that time, you May press, the Starkey followed by the number one.

Please also note that today's call is being recorded.

I'll now turn the call over to your host Dennis Mcdaniel Investor Relations Officer, Sir you May now begin.

Hello, This is Dennis Mcdaniel at Cincinnati financial.

Thank you for joining us for our first quarter 2022 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, <unk> Dot com slash investors. The shortest route to the information is our quarterly results link and then navigation menu on the far left.

On this call you'll first hear 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 maybe made by others in the room with us, including Chief investment Officer, Marty Hollenbeck and so.

<unk> insurance as President Steve spray.

<unk> 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.

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 it over the call to Steve. Thanks.