Q2 2022 Cincinnati Financial Corp Earnings Call
Good morning, the Cincinnati financial second quarter 2022 earnings call will begin momentarily. Please continue to hold thank you.
[music].
Hello, and welcome to the Cincinnati Financial second quarter 2022 earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone.
To withdraw your question. Please press Star then two 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.
Hello. This is Dennis Mcdaniel Investor Relations Officer at Cincinnati financial Thank you for joining us for our second 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 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, maybe made by others in the room with us, including President, Steve Spray Executive Vice President and Chief Investment Officer, Marty Hollenbeck, and Cincinnati Insurance's, Chief claims 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 the call to Steve.
Thank you Dennis.
Good morning, and thank you for joining us today to hear more about our second quarter results.
Increased catastrophe losses, and increasing inflation affecting the industry pressured our property casualty insurance results for this quarter.
We are well positioned to improve results through continued focus on pricing and risk selection as we have in the past we will follow our proven formula to successfully analyzed and address challenged areas of our insurance operations.
Our financial strength remains excellent and we are confident we can achieve profitable growth over the long term and through all economic cycles cycles.
We reported a net loss of $800 million $808 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 of $104 million for the second quarter of 2022 was down from last year's impressive $292 million largely due to catastrophe losses that were $119 million higher on an after tax basis.
Our 103, 2% second quarter property casualty combined ratio was $17 seven percentage points higher than the 85, 5% posted second quarter of last year.
That increase reflected higher catastrophe losses, and less favorable results on both the prior accident year and current year current accident year basis.
We regularly disclose large losses exceeding $1 million for individual property casualty claims excluding losses from catastrophes.
Commercial property and commercial umbrella tend to account for the bulk of those losses.
It's typically about one third of total large losses.
We noted on our last call that commercial property large losses rose sharply in the first quarter of this year that increase reversed in the second quarter when they declined 86% from the second quarter of 2021.
For our personal lines segment net written premiums grew 16%.
Sorry.
Yeah.
However, in the second quarter commercial umbrella losses rose significantly.
<unk> reserve additions that we detailed in our 10-Q that business has long history of profitability for US and has benefited from very strong pricing in recent years for both the industry and us.
Overall premiums continued a healthy growth pattern with steady average renewal price increases for each of our property casualty insurance segments.
We benefited from outstanding production from the finest independent agents, while our underwriters remain steadfast seeking to retain and grow profitable accounts and address areas, where they judge pricing is not adequate.
Adequate.
Segmenting opportunities on a policy by policy basis.
Consolidated property casualty net written premium rose said for the second quarter of 2022.
Our commercial lines insurance segment continued to experience estimated average renewal price increases in the mid single digit percentage range similar to the first quarter.
Our excess and surplus lines insurance segment continued in the high single digit range.
Personal lines average renewal price increases were slightly higher than in the first quarter remaining in the low single digit range.
Personal auto is an area, where we plan to more aggressively raise rates in future quarters, as we work to improve its loss ratio.
Underwriting processes designed to help premiums keep pace with rising property values, whether from outsized inflation or other changes and insured exposure amounts are another reason for significant increases in 2022 renewal written premiums.
Our commercialized segment grew second quarter renewal premiums by 10%.
Our personal lines segment also grew second quarter renewal premiums by 10%.
The commercial lines segment grew second quarter 2022, net written premiums by 10% with a combined ratio of 106, three including higher than usual catastrophe losses and elevated inflation effects.
For our personal lines segment net written premiums grew 16% mostly from our continued planned expansion of high net worth business produced by our agencies.
The second quarter combined ratio of 112, 1% also included higher than usual catastrophe losses and elevated inflation effects.
Yeah.
The second quarter provided another example of the benefits of improving diversification over time by product line and geography.
Profitability was very good for our operations in excess and surplus lines insurance reinsurance global specialty insurers and life insurance.
Our excess and surplus lines segment had at 85, 1% combined ratio and continued strong growth with second quarter 2022, net written premiums growing 17%.
Cincinnati re and Cincinnati global each continued a pattern of profitable growth Cincinnati re grew net written premiums by 31% for the second quarter of 2022 with a combined ratio in the low 80% range.
Cincinnati Global grew net written premiums by 47% with a combined ratio below 70%.
Our life insurance subsidiary had another good quarter with net income of $21 million and a 91% increase in operating income along with growth in term life insurance earned premiums of 8%.
We continue to emphasize the importance overtime of the value creation ratio our primary measure of long term financial performance.
V C. R was negative 11, 2% for the second quarter of 2022.
Net income before investment gains or losses made a positive contribution but was offset by lower investment valuations during the quarter.
Next Chief Financial Officer, Mike Sewell will discuss a few more important insights regarding our financial performance.
Thank you, Steve and thanks to all of you for joining us today.
Investment income continues to grow and was up 11% for the second quarter of 2022, compared with the second quarter of last year.
Dividend income rose, 20% for the quarter.
<unk> by $5 million special dividend from one of our stock holdings.
Net equity Securities purchased during the first half of 2022 totaled $40 million.
Bond interest income grew 6% in the second quarter.
The pretax average yield of 4% for the fixed maturity portfolio was down two basis points from a year ago.
The average pre tax yield for the total of purchase taxable and tax exempt bonds. During the second quarter of 2022 was 4.75%.
We again purchase additional fixed maturity securities with net purchases totaling $240 million during the first six months of the year.
Valuation changes for our investment portfolio during the second quarter of 2022.
Were unfavorable in aggregate for both our stock and bond holdings.
The overall net decrease was approximately $1 $8 billion before tax effects, including a net decrease of $610 million for unrealized gains in our bond portfolio.
At the end of the quarter total investment per poorly portfolio net appreciated value was approximately $4 $7 billion. The equity portfolio was in a net gain position of $5 $3 billion, while the fixed maturity portfolio was in a.
Net loss position.
$564 million.
Cash flow continues to fuel growth of investment income.
Cash flow from operating activities for the first six months of 2020 to generate $755 million compared with $917 million a year ago.
As in the past, we emphasize careful management of expenses and balance that with strategic investments in our business the.
Our second quarter 2022 property casualty underwriting expense ratio was 0.6 percentage points lower than last year.
Most of the decrease was from lower accruals for profit sharing commissions for agencies and related expenses.
Moving on to 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.
As we do each quarter.
We considered new information such as paid losses in case reserves, and then updated estimated ultimate losses and loss expenses by accident year and line of business.
In the first half of 2022, our net addition to reserves was $414 million.
Pace, well ahead of 2021 or 2020 and a level. We believe is an indication of the quality of our balance sheet.
During the second quarter of 2022, we experienced $59 million of property casualty net favorable development on prior accident years, the benefit of the combined ratio by three four percentage points.
On an all lines basis by accident year net reserve development for the first six months of 2022 was favorable and included $61 million for 2021 and $54 million for 2020 that was partially offset by an unfavorable $15 million in.
Aggregate.
For accident years prior to 2020.
Next I'll comment briefly on capital management.
We've had a consistent approach that includes share repurchases as part of maintenance intended to offset shares issued through equity compensation plans.
At the same time.
Changing circumstances or opportunities can influence us to repurchase more or less than historical averages. We continue to believe that we have plenty of financial flexibility and that our financial strength at the end of the quarter was excellent.
Shareholder dividends continue to be our primary way of returning capital to shareholders in cash dividends declared in the first half of 2022 are up 10%.
In addition, during the second quarter, we repurchased just over $1 2 million shares at an average price per share of $124 44 sites.
As usual I'll conclude with a summary of second quarter contributions to book value per share. They represent the main drivers of our value creation ratio.
Property casualty underwriting decreased book value by <unk> 26 cents.
Life insurance operations increased book value by 13th.
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 $3.03.
Net investment gains and losses for the equity portfolio decreased book value by $5.81.
And we declared 69 per share in dividends to shareholders.
The net effect was a book value decrease of $9 13 per share during the second quarter to $66 30 per share.
And now I'll turn the call back over to Steve.
Thanks, Mike.
While this wasn't the kind of quarter, we want to have one quarter doesn't sway us from our long term strategies and objectives, our financial strength remains excellent and we are optimistic about the future.
In the last month three different third party organizations agreed Moody's and S&P, both affirmed our strong financial strength ratings. We were also again included on the Ward's 50 list.
We are one of only four companies named 31 times to the property casualty wards 50, recognizing that our growth profitability and shareholder return.
Before we open the call for questions I'd like to pause to recognize Marty hollenback.
Any of you know Marty from his years of Investor travel He's announced his intent to retire at the end of September after 35 years of service to our organization.
We thank him for his steady hand, overseeing investments, especially during some of the very challenging times of market volatility.
As I'm sure you can all imagine we're sad to see Marty go.
At the same time, however, I have absolute confidence in Steve Sul area and his ability to smoothly step in to lead our investment operation with his nearly 30 years of experience.
I know you all will feel the same as you get to know him during future investor visits.
As a reminder, with Marty Mike and me today are Steve spray, Marty Shambaugh and Theresa Hoffer.
<unk>. Please open the call for questions.
Thank you.
We will now begin the question and answer session. Our lines are open to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys is that anytime you're question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question today.
It comes from Derek hard of K B W. Please go ahead.
Good morning. Thanks, a lot. So my first question is two parts related to the commercial umbrella line of business.
Readjust to your loss picks last quarter, but just curious what kind of new information that you've gotten to make another adjustment this quarter and then secondly, since the umbrella umbrella line of businesses pretty heavily exposed to inflation, how comfortable do you feel about the leasing assumptions embedded within your reserve.
Being an accident year loss picks.
Hey, Derrick Steve spray here. Thanks for the question, Yes, we are here in the second quarter, we've definitely seen inflationary impacts as well as pandemic effects on the umbrella book as an example.
Chlor courts closed during the pandemic slower to open.
We're seeing that show up.
I would also say that our umbrella book in general just.
From quarter to quarter is going to have.
Inherent variability and we've seen that here in the second quarter, maybe for note as well is that that book our commercial umbrella book is.
And up over $500 million now and we've got a long track record of underwriting profit understanding how to price that book the limits profile on it is relatively is relatively lower.
The book reflects our primary business, which is tends to be smaller to mid size accounts. That's the business that were primarily writing the umbrella coverage coverage is over so.
There is uncertainty for sure there is inherent variability.
Youre seeing that in the actual results and then on top of that as you can expect from Cincinnati.
Our long track record of recognizing uncertainty.
We've gone ahead and recognized that through.
<unk> for the reserving.
Of the umbrella going forward too.
Yeah.
Okay. That's really helpful. And then my second question is around the personal lines segment.
Really good growth in that segment, especially within the high net worth business.
You talked about in the past about how the high net worth business has the longer term attractiveness relative to the middle market business, but I'm just curious how you think about the overall profitability in the near term.
Just in the context of rising loss trends.
Yes, Derek again, Steve spray, Yeah, we are feeling really good.
About the high net worth business, primarily the team that we've assembled the expertise the experience that they have and youre right.
A majority of our growth in personal lines right now is coming from high net worth on.
On the written premium side, it's almost all coming from high net worth on new business, we have seen our middle market book rebound, although again, the new business lion's share is still coming.
From the high net worth high net worth is important to US. We think we have a valuable contract we think the way we handle claims.
His work more premium.
But that being said I wouldn't want anybody to think that we are not.
Completely focused on that middle market book as well, we think that we are in a unique position that we.
Have a sophisticated pricing we have the products we have the team.
We have the.
Historical experience long term on.
On the middle market book.
As well so we feel good about the middle market book, maybe to get a little deeper for you there.
Personal auto.
Obviously is under pressure a lot of that.
Is coming from inflation, we're taking rate we've been taking rate in 'twenty and 2022, we'll continue to take rate and that personal auto book in 2022 and.
And we expect in 2023 that we're going to take a little bit a little more than double the rate in the personal auto book.
Sure.
That we are that we are this year. The homeowner book is performing better.
But it is under a little bit of pressure as well, we're taking rate in 'twenty. Two we plan to continue to take rate in 2023.
And the other thing I would add there is in homeowner line.
We are getting high single digit.
Exposure changed there too so that's helping with the inflationary pressure that we're feeling.
Got it I appreciate the color on that and then last just numbers question did you see any Russia, Ukraine related loss this quarter.
This is Steve Johnston and yes, we did for the quarter.
And this would come from our Cincinnati re and Cincinnati global areas for the quarter of $6 million and for the year to date 11. So we think we have that.
Properly managed.
Okay. Thank you very much.
Yeah.
Okay. Thank you.
And again, if you have a question. Please press Star then one.
Our next question comes from Mark Dwelle of RBC. Please go ahead.
Yes, good morning, guys.
I have a few questions.
Yes.
Starting with the commercial lines when when you.
You reported a 64 eight.
Accident year.
Loss ratio before cat losses that was up seven points is is all of that second quarter or is there a catch up within that to catch up for <unk>.
First quarter loss trend.
Mark This is Steve Johnston and that would be our first quarter Pik.
I'm, sorry second quarter pick that would be just the quarters pick.
So the relatively lower loss pick that you had for the first quarter.
You've picked in them.
And I'm just trying to make sure I understand the based on the run rate you are seeing right now you would like your loss pick to be roughly 65 points as compared to the relatively lower pick that you had in the first quarter.
We just for each quarter, we tried to do our best estimate.
Of our reserves of our losses in the premiums for each.
Of the quarter. So the two stand on their own and of course year to date would be the sum of the two.
Okay understood and I presume the same applies related to the personal lines.
The eight point bump there that.
Accident year loss pick that's all just on Theres no prior quarter development embedded within that number.
That's correct.
Okay.
When you think about.
Your loss cost trends right now and I appreciate they they vary by line of business.
We're thinking about the last year average loss cost trend across the entire commercial lines book for example, what would you say that that is right now based upon what youre seeing in your data.
Well Youre right Mark that it is.
Done at a very detailed level and when we look at our prospects.
We do it prospectively, we tried to estimate.
What we think.
We need to trend losses for into the prospective rating period for the policies that will be effective.
We do think Steve.
Steve kind of alluded to that we are in a position that we.
Can.
Keep with keep up with.
And or exceed those loss cost trends as we go forward.
Yeah.
I mean can you can you share sort of a run rate number I mean, some companies have said five some of that six six and a half.
Is there a number you can share in terms of what youre seeing as far as trend.
We don't have a specific number like that in terms of the other.
The number you know, but when we do talk about.
Getting.
Mid single digit rate and.
And as Steve alluded to for both personal and commercial some inflationary effects on our.
Exposure growth.
We feel that we can keep pace with.
And exceed that trend.
Okay.
Turning over to the personal lines.
I mean again, you commented that youre getting kind of low single digit.
Rates across the personal line book can you can you break that between what portion or what youre seeing in the auto book as compared to the.
The homeowners book.
Yes.
This is Steve again for the auto it would be you currently in the low single digit and for the homeowners in the mid single digits.
And again as Steve mentioned for the whole motors there is.
Exposure growth and the rate for inflation.
In addition to currency rate that we quote.
Rate increases.
As far as raising the rates on the auto book more aggressively or are you largely locked in on those rates now for this year based on your state filings.
You have to kind of begin that process from from the start in order to try to get more I asked because I mean, your average rate increase in your auto book seems to be distinctly below where I would see at least some of your competitors at.
Okay.
It's a rolling process. So we're already engaged in some of the 2023 rate increases and then also.
You know a point, we make is through the pandemic we did not.
Reduce our rates.
Any thoughts there at all we did have a kind of a stay at home discount that was in place on the expense side for.
Several weeks, but did not take rate decreases.
But there's not much you can really do to improve the rate picture for 2022, its youre pretty much just beginning the process of.
Trying to tackle on 'twenty three is that is that what I'm hearing.
Well, it's ongoing it's rolling.
They've already been filed but to your point.
So we both kind of understand the earnings diagram for 2022 in terms of how rate will be earned during 2022.
Yeah.
The ones that are in process.
Don't move the needle much.
Alright, okay.
One other question related to the investment portfolio I guess I was a little surprised that.
The average pre tax yield was effectively unchanged in the quarter I would've thought if for no. Other reason than just getting better interest rates on your shorter term money.
Would've pushed a little bit higher but can you talk about maybe some of the dynamics there.
When we might see that move a little bit higher.
Yes, Mark this is Marty I think youll start to see it soon.
That's what you would look there is actually the realized yield our book value ended the quarter four basis points.
Higher than Q.
Q1, although still five basis points less than a year ago in the second quarter. So we kind of had a little bit of a muted effect in the first quarter of the run up in rates. It was sort of back loaded so we didn't quite get the benefit.
So with a little bit longer duration that typical quite see it but we.
We saw definitely a significant rise and.
Q2, I think book yield purchased for the taxable was just under 5%.
Tax exempt was about four so it should start being more pronounced going forward here in the next couple of quarters.
I see okay. So you are getting.
Somewhere between 50, and 100 basis points of <unk>.
Incremental.
New money rate relative to kind of where the realized book rate is right now is that about right.
Yeah about probably about three quarters 70 to 75 basis points.
Okay.
I'll stop there thank you.
Thank you Mark.
Our next question comes from Paul Newsome of Piper Sandler. Please go ahead.
Okay.
Thank you good morning.
I wanted to hone in a little bit on the large losses again.
And is there any way to kind of think about that.
The increase from an inflationary perspective.
This is <unk>.
That would be done.
Sheri frequency level, maybe just soon.
On through the quarter and as we look at it sort of that impact and thinking about it in a perspective they spoke to the.
Personalized business as well as for the commercial lines business right.
Large losses in general.
Yes.
Paul Steve spray again.
I would say again that umbrella book there is inherent variability in it.
Statistically.
The number of losses that are there. It's just it's a really it's a really low number from quarter to quarter. So it jumps. It's a it's a it's a smaller number I would say other than inflationary factor, which is certainly.
Larry factors certainly paying.
Sure.
Playing a role in that was what I mentioned earlier was just the the courts reopening coming out of the pandemic, we've noticed that that has.
That's impacted the quarter.
I don't know if Steve wants to add anything to that or not.
That's hard to improve.
To improve upon I guess my thought would think of any.
Other comment would be umbrella is it attaches at a higher layer and so there is a leveraged impact of inflation.
What I mean by that is if you know.
Historically.
Is just below the retention.
Now with inflation heating up it would inflate into the layer and so you have a leveraged effect on <unk>.
The upper layers like an umbrella policy, which would add to the claim count.
Hey, Paul again, Steve spray I might just add a couple of things there for you.
It's not uncommon.
Auto auto losses, both personal and commercial are what get up into that umbrella layer.
Those umbrella layers and we saw that.
In the second quarter so.
It's larger auto claims that have.
<unk> gotten up in there we look at every single one of these claims as I mentioned in the first quarter.
And as far as geography or class of business industry segment.
We're not.
Theres randomness, there and we're not seeing any any pattern. So I thought I might add that for you too.
Great.
Clarifying apologize I'd be very slow.
Are these the umbrella.
Both commercialized personal lines it just commercial lines and I guess your comments in the autos that also.
Commercial lines and personal lines.
Auto creeping up into umbrella on both sides of the business.
Yourself.
So we write commercial umbrella over commercial business, obviously and personal umbrella over personal and personal lines is always it's almost always.
Predominantly auto claims that get into your umbrella policies there on the commercial side.
It varies between say general liability claims that can bounce up into the umbrella R. R.
Commercial auto.
I would say that we've seen just to <unk>.
Slight uptick in the commercial auto getting into the umbrella.
So the umbrella cases are.
On the commercial lines.
Auto was two.
<unk>.
The commercial umbrella is not necessarily related to just on the commercial side.
That's correct.
Okay. Thank you.
Appreciate it as always.
Okay.
Seeing no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Steve Johnston for any closing remarks.
Thank you M J and thank you all for joining US today, we look forward to speaking with you again on our third quarter call.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
[music].
[music].
Hello, and welcome to the Cincinnati Financial second quarter 2022 earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone.
To withdraw your question. Please press Star then two please.
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.
Yeah.
Hello. This is Dennis Mcdaniel Investor Relations Officer at Cincinnati financial Thank you for joining us for our second 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 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 Soul.
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 President, Steve Spray Executive Vice President and Chief Investment Officer, Marty Hollenbeck, and Cincinnati Insurance's, 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 it over the call to Steve.
Thank you Dennis.
Good morning, and thank you for joining us today to hear more about our second quarter results.
Increased catastrophe losses, and increasing the inflation affecting the industry pressured our property casualty insurance results for this quarter.
We are well positioned to improve results through continued focus on pricing and risk selection as we have in the past we will follow our proven formula to successfully analyzed and address challenged areas of our insurance operations.
Our financial strength remains excellent and we are confident we can achieve profitable growth over the long term and through all economic cycles cycles.
We reported a net loss of $800 million eight.
$808 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 of $104 million for the second quarter of 2022 was down from last year's impressive $292 million largely due to catastrophe losses that were $119 million higher on an after tax basis.
Our 103, 2% second quarter property casualty combined ratio was $17 seven percentage points higher than the 85, 5% posted second quarter of last year.
That increase reflected higher catastrophe losses, and less favorable results on both the prior accident year and current year current accident year basis.
We regularly disclose large losses exceeding $1 million for individual property casualty claims excluding losses from catastrophes.
Commercial property and commercial umbrella tend to account for the bulk of those losses.
Each typically about one third of total large losses.
We noted on our last call that commercial property large losses rose sharply in the first quarter of this year that increase reversed in the second quarter when they declined 86% from the second quarter of 2021.
For our personal lines segment net written premiums grew 16%.
Sorry.
Yes.
However, in the second quarter commercial umbrella losses rose significantly.
Prompting reserve additions that we detailed in our 10-Q that business has long history of profitability for US and has benefited from very strong pricing in recent years for both the industry and us.
Overall premiums continued a healthy growth pattern with steady average renewal price increases for each of our property casualty insurance segments.
We benefited from outstanding production from the finest independent agents, while our underwriters remain steadfast and seeking to retain and grow profitable accounts and address areas, where they judge pricing is not adequate.
Adequate.
Segmenting opportunities on a policy by policy basis.
Consolidated property casualty net written premium rose said for the second quarter of 2022.
Our commercial lines insurance segment continued to experience estimated average renewal price increases in the mid single digit percentage range similar to the first quarter.
Our excess and surplus lines insurance segment continued in the high single digit range.
Personal lines average renewal price increases were slightly higher than in the first quarter remaining in the low single digit range.
Personal auto is an area, where we plan to more aggressively raise rates in future quarters, as we work to improve its loss ratio.
Yes.
Underwriting processes designed to help premiums keep pace with rising property values, whether from outsized inflation or other changes and insured exposure amounts are another reason for significant increases in 2022 renewal written premiums.
Our commercial lines segment grew second quarter renewal premiums by 10%.
And our personal lines segment also grew second quarter renewal premiums by 10%.
The commercial lines segment grew second quarter 2022, net written premiums by 10% with a combined ratio of 106, three including higher than usual catastrophe losses and elevated inflation effects.
For our personal lines segment net written premiums grew 16% mostly from our continued planned expansion of high net worth business produced by our agencies.
It's second quarter combined ratio of 112, 1% also included higher than usual catastrophe losses and elevated inflation effects.
Yes.
The second quarter provided another example of the benefits of improving diversification over time by product line and geography.
Profitability was very good for our operations in excess and surplus lines insurance reinsurance global specialty insurers and life insurance.
Our excess and surplus line segment had at 85, 1% combined ratio and continued strong growth with second quarter 2022, net written premiums growing 17%.
Cincinnati re and Cincinnati global each continued a pattern of profitable growth.
Cincinnati re grew net written premiums by 31% for the second quarter of 2022 with a combined ratio in the low 80% range.
Cincinnati Global grew net written premiums by 47% with a combined ratio below 70%.
Our life insurance subsidiary had another good quarter with net income of $21 million and a 91% increase in operating income along with growth in term life insurance earned premiums of 8%.
We continue to emphasize the importance overtime of the value creation ratio our primary measure of long term financial performance.
VCR was negative 11, 2% for the second quarter of 2022.
Net income before investment gains or losses made a positive contribution but was offset by lower investment valuations during the quarter.
Next Chief Financial Officer, Mike Sewell will discuss a few more important insights regarding our financial performance.
Thank you, Steve and thanks to all of you for joining us today.
Investment income continues to grow and was up 11% for the second quarter of 2022, compared with the second quarter of last year.
Dividend income rose, 20% for the quarter aided by $5 million special dividend from one of our stock holdings.
Net equity Securities purchased during the first half of 2022 totaled $40 million.
Bond interest income grew 6% in the second quarter.
The pretax average yield of 4% for the fixed maturity portfolio was down two basis points from a year ago.
The average pre tax yield for the total of purchase taxable and tax exempt bonds. During the second quarter of 2022 was $4 seven 5%.
We again purchase additional fixed maturity securities with net purchases totaling $240 million during the first six months of the year.
Valuation changes for our investment portfolio during the second quarter of 2022 were unfavorable in aggregate for both our stock and bond holdings the.
Overall net decrease was approximately $1 $8 billion before tax effects, including a net decrease of $610 million for unrealized gains in our bond portfolio.
At the end of the quarter total investment per poorly portfolio net appreciated value was approximately $4 $7 billion. The equity portfolio was in a net gain position of $5 $3 billion, while the fixed maturity portfolio was in a.
Net loss position of $564 million.
Cash flow continues to fuel growth of investment income.
Cash flow from operating activities for the first six months of 2020 to generate $755 million compared with $917 million a year ago.
As in the past, we emphasize careful management of expenses and balance that with strategic investments in our business the.
Our second quarter 2022 property casualty underwriting expense ratio was 0.6 percentage points lower than last year.
Most of the decrease was from lower accruals for profit sharing commissions for agencies and related expenses.
Moving on to 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.
As we do each quarter.
We considered new information such as paid losses in case reserves, and then updated estimated ultimate losses and loss expenses by accident year and line of business.
In the first half of 2022, our net addition to reserves was $414 million.
Pace, well ahead of 2021 or 2020 and a level. We believe is an indication of the quality of our balance sheet.
During the second quarter of 2022, we experienced $59 million of property casualty net favorable development on prior accident years that benefited our combined ratio by three four percentage points.
On an all lines basis by accident year net reserve development for the first six months of 2022 was favorable and included $61 million for 2021 and $54 million for 2020 that was partially offset by an unfavorable $15 million in.
In aggregate.
For accident years prior to 2020.
Next I'll comment briefly on capital management.
We've had a consistent approach that includes share repurchases as part of maintenance intended to offset shares issued through equity compensation plans.
At the same time.
Changing circumstances or opportunities can influence us to repurchase more or less than historical averages. We continue to believe that we have plenty of financial flexibility and that our financial strength at the end of the quarter was excellent.
Shareholder dividends continue to be our primary way of returning capital to shareholders in cash dividends declared in the first half of 2022 are up 10%.
In addition, during the second quarter, we repurchased just over $1 2 million shares.
And average price per share of $124 44.
As usual I'll conclude with a summary of second quarter contributions to book value per share. They represent the main drivers of our value creation ratio.
Property casualty underwriting decreased book value by <unk> 26.
Life insurance operations increased book value by 13th.
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 three.
Net investment gains and losses for the equity portfolio decreased book value by $5 81.
And we declared <unk> 69 per share in dividends to shareholders.
Net effect was a book value decrease of $9 13 per share during the second quarter to $66 30 per share and.
And now I'll turn the call back over to Steve.
Thanks, Mike.
While this wasn't the kind of quarter, we want to have one quarter doesn't sway us from our long term strategies and objectives, our financial strength remains excellent and we are optimistic about the future.
In the last month three different third party organizations agreed Moody's and S&P, both affirmed our strong financial strength ratings. We were also again included on the Ward's 50 list.
We are one of only four companies named 31 times to the property casualty wards 50, recognizing our growth profitability and shareholder return.
Before we open the call for questions I'd like to pause to recognize Marty hollenbeck.
Many of you know Marty from his years of Investor travel is.
He has announced his intent to retire at the end of September after 35 years of service to our organization.
We thank him for his steady hand, overseeing investments, especially during some of the very challenging times of market volatility.
As I'm sure you can all imagine we're sad to see Marty go.
At the same time, however, I have absolute confidence in Steve <unk> area and his ability to smoothly step in to lead our investment operation with his nearly 30 years of experience.
I know you all will feel the same as you get to know him during future investor visits.
As a reminder, with Marty Mike and me today are Steve spray, Marty Shambaugh and Theresa Hoffer.
<unk>. Please open the call for questions.
Thank you.
We will now begin the question and answer session.
Lines are open.
Ask a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys is that anytime Youre question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yeah.
Yeah.
Our first question today.
It comes from Derek Han of K B W. Yeah. Please go ahead.
Good morning. Thanks, a lot. So my first question is two parts related to the commercial umbrella line of business.
Readjust to your loss picks last quarter, but just curious what kind of information that you've got to make another adjustment. This quarter and then secondly, since the Bradley umbrella line of businesses pretty heavily exposed to inflation, how comfortable do you feel about the leasing assumptions embedded within your reserve.
Being an accident year loss picks.
Hey, Derrick Steve spray here. Thanks for the question, Yes, we are here in the second quarter, we've definitely seen inflationary impacts as well as pandemic effects on the umbrella book as an example.
Claude courts closed during the pandemic slower to open.
We're seeing that show up.
I would also say that our umbrella book in general just.
From quarter to quarter is going to have.
Inherent variability and we've seen that here in the second quarter, maybe for note as well is that that book our commercial umbrella book is.
Up over $500 million now and we've got a long track record of underwriting profit understanding how to price that book the limits profile on it is relatively is relatively lower.
The book reflects our primary business, which is tends to be smaller to mid size accounts. That's the business that were primarily writing the umbrella coverage coverage is over so you know there is uncertainty for sure there is inherent variability.
Youre seeing that in the actual results and then on top of that as you can expect from Cincinnati.
Our long track record of recognizing uncertainty.
Gone ahead and recognized that through.
<unk> for the reserving.
Of the umbrella going forward too.
Yeah.
Okay. That's really helpful. And then my second question is around the personal lines segment.
Really good growth in that segment, especially within the heightened with business.
You've talked about in the past about how the high net worth business has the longer term attractiveness relative to the middle market business.
Just curious how you think about the overall profitability in the near term.
Just in the context of rising loss trends.
Yes, Derek again, Steve spray, Yeah, we are feeling really good.
The high net worth business, primarily the team that we've assembled the expertise the experience that they have and you're right. The majority of our growth in personal lines right now is coming from high net worth.
On the written premium side, it's almost all coming from high net worth on new business, we have seen our middle market book rebound, although again, the new business lion's share is still coming.
From the high net worth high net worth is important to US. We think we have a valuable contract we think the way we handle claims.
His work more premium.
But that being said I wouldn't want anybody to think that we are not.
Completely focused on that middle market book as well, we think that we are in a unique position that we are.
Have the sophisticated pricing we have the products we have the team we.
We have the.
Historical experience long term.
On the middle market book.
As well so we feel good about the middle market book, maybe to get a little deeper 40 their.
Personal auto.
Obviously is under pressure a lot of that.
As coming from inflation, we're taking rate we've been taking rate in 'twenty and 2022, we'll continue to take rate and that personal auto book in 2022.
And we expect in 2023 that we're going to take a little bit a little more than double the rate in the personal auto book.
<unk>.
That we are that we are this year. The homeowner book is performing better.
But it is under a little bit of pressure as well, we're taking rate in 'twenty. Two we plan to continue to take rate in 2023.
And the other thing I would add there is in homeowner line.
We are getting high single digit.
Exposure changed there too so that's helping with the inflationary pressure that we're feeling.
Got it I appreciate the color on that and then last just numbers question did you see any Russia, Ukraine related loss this quarter.
This is Steve Johnston and yes, we did for the quarter.
And this would come from our Cincinnati re and Cincinnati global areas for the quarter $6 million and for the year to date 11. So we think we have that.
Properly managed.
Okay. Thank you very much.
Yeah.
Yeah.
Okay. Thank you.
Alright, and again, if you have a question. Please press Star then one.
Our next question comes from Mark Dwelley of RBC. Please go ahead.
Yes, good morning, guys.
I have a few questions.
Starting with the commercial lines when you when you get your.
You reported a 64 eight.
The accident year.
Loss ratio before cat losses that was up seven points.
Is all of that second quarter or is there a catch up.
Within that to catch up for.
First quarter loss trend.
Mark This is Steve Johnston and that would be our first quarter Pik.
I'm, sorry second quarter pick that would be just the quarters pick.
So the relatively lower loss pick that you had for the first quarter.
You've picked a number.
And I'm, just trying to make sure I understand it.
Based on the run rate you are seeing right now you would like your loss pick to be roughly 65 points as compared to the relatively lower pick that you had in the first quarter.
We just for each quarter, we tried to do our best estimate.
Our reserves of our losses in the premiums for each.
Of the quarter. So the two stand on their own and of course year to date would be the sum of the two.
Okay understood and then I presume the same applies related to the personal lines.
The eight point bump there that.
Accident year loss pick that's all just on there's no prior quarter development embedded within that number.
That's correct.
Okay.
When you think about.
Your loss cost trends right now and I appreciate they they vary by line of business.
We're thinking about the last year average loss cost trend across the entire commercial lines book for example, what would you say that that is right now based upon what youre seeing in your data.
Well Youre right Mark that it is.
Done at a very detailed level and when we look at our prospects.
We do it prospectively, we tried to estimate.
What we think.
We need to trend losses for into the prospective rating period for the policies that will be effective.
We do think Steve.
Steve kind of alluded to that we are in a position that we.
Can.
Keep with keep up with.
And or exceed those loss cost trends as we go forward.
Yeah.
I mean can you can you share sort of a run rate number I mean, some companies have said five some of that six six and a half.
Is there a number you can share in terms of what youre seeing as far as trend.
We don't have a specific number like that in terms of the other number you know, but when we do talk about.
Getting.
Mid single digit rate.
And as Steve alluded to for both personal and commercial some inflationary effects on our.
Exposure growth.
We feel that we can keep pace with.
And exceed that trend.
Okay.
Turning over to the personal lines.
I mean again, you commented that youre getting kind of low single digit.
Rates across the personal line book can you can you break that between what portion or what youre seeing in the auto book as compared to the.
The homeowners book.
Yes.
This is Steve again for the auto it would be currently in the low single digit and for the homeowners in the mid single digit.
And again as Steve mentioned for the whole motors there is.
Exposure growth and the rate for inflation.
In addition to.
Right that we quote.
Rate increases that we take.
As far as raising the rates on the auto book more aggressively or are you largely locked in on those rates now for this year based on your state filings.
You have to kind of begin that process from from the start in order to try to get more I asked because I mean, your average rate increase in your auto book seems to be distinctly below where I would see at least some of your competitors out.
It's a rolling process. So we're already engaged in some of the 2023 rate increases and then also.
You know a point, we make is through the pandemic we did not.
Reduce our rates.
Any through there at all we did have a kind of a stay at home discount that was in place on the expense side for.
Several weeks, but did not take rate decreases.
But there's not much you can really do to improve the rate picture for 2022, its youre pretty much just beginning the process of.
Trying to tackle on 'twenty three is that is that what I'm hearing.
Well, it's ongoing it's rolling.
They've already been filed but to your point.
So we both kind of understand the earnings diagram for 2022 in terms of how rate will be earned during 2022.
Yeah.
The ones that are in process.
Don't move the needle much.
Alright, okay.
One other question related to the investment portfolio I guess I was a little surprised that.
The average pre tax yield was effectively unchanged in the quarter I would've thought if for no. Other reason than just getting better interest rates on your shorter term money.
Would've pushed a little bit higher but can you talk about maybe some of the dynamics there.
When we might see that move a little bit higher.
Yes, Mark this is Marty yeah, I think you'll start to see it soon.
That's what you would look there is actually the realized yield our book value ended the quarter four basis points.
Higher than Q.
Q1, although still five basis points less than a year ago in the second quarter. So we kind of had a little bit of a muted effect in the first quarter of the run up in rates. It was sort of back loaded so we didn't quite get the benefit.
With a little bit longer duration that typical quite see it but we saw definitely a significant rise and.
Q2, I think book yield purchased for the taxable was just under five.
Tax exempt was about four so it should start being more pronounced going forward here in the next couple of quarters.
I see okay. So you are getting.
Somewhere between 50, and 100 basis points of incremental.
New money rate relative to kind of where the realized book rate is right now is that about right.
Yeah about probably about three quarters 70 to 75 basis points.
Okay.
I'll stop there thank you.
Thank you Mark.
Our next question comes from Paul Newsome of Piper Sandler. Please go ahead.
Thank you good morning.
I wanted to hone in a little bit on the large losses again.
And is there any way to kind of think about that.
The increase from an inflationary perspective.
This is no easy that would be done.
Thanks, Gary.
Frequency level, maybe just saw.
Something that on through the quarter.
As we look at it sort of net impact.
Goodbye this perspective, they spoke to the.
Personalized business as well as through the commercial lines business.
Large losses in general.
Yes.
Paul Steve spray again.
I would say again that umbrella book there is inherent variability in it.
Statistically.
The number of losses that are there. It's just it's a really it's a really low number from quarter to quarter. So it jumps. It's a it's a it's a smaller number I would say other than inflationary factor, which is certainly.
Larry factor is certainly paying off.
Sure.
Playing a role in that was what I mentioned earlier was just the the court's reopening coming out of the pandemic, we've noticed that that has.
That's impacted the quarter.
I don't know if Steve wants to add anything to that or not.
Thats hard to improve.
To improve upon I guess my thought would think of any.
Other comment would be umbrella is it attaches at a higher layer and so there is a leveraged impact of inflation.
What I mean by that is if you know.
Historically.
<unk> is just below the retention.
Now with inflation heating up it would inflate into the layer. So you have a leveraged effect on <unk>.
The upper layers like an umbrella policy, which would add to the claim count.
Hey, Paul again, Steve spray I might just add a couple of things that are four years.
It's not uncommon that.
Auto auto losses, both personal and commercial are what get up into that umbrella layer.
Those umbrella layers and we saw that.
In the second quarter. So it's it's it's larger auto claims that have.
<unk> gotten up in there we look at every single one of these claims as I mentioned in the first quarter.
And as far as geography or class of business industry segment.
We're not.
Theres randomness, there and we're not seeing any any pattern. So I thought I might add that for you too.
Great.
Clarifying apologize I can be very slow.
The umbrella.
Both commercialized in personal lines is just commercial lines and I guess your comments in the autos that also.
Commercial lines and personal lines.
Although creeping up into umbrella on both sides of the business or just the commercial side.
Well, yes, so we write commercial umbrella over commercial business, obviously and personal umbrella over personal and personal lines is always it's almost always.
Predominantly auto claims that get into your umbrella policies there on the commercial side.
It varies between say general liability claims that can bounce up into the umbrella R. R.
Commercial auto.
Would say that we've seen just to <unk>.
Slight uptick in the commercial auto getting into the umbrella.
So the umbrella cases are.
On the commercial lines.
Auto was elevated to push a lot of those elements to that that the commercial umbrella is not necessarily related to just one.
At that time.
That's correct.
Okay. Thank you.
Appreciate it as always.
Seeing no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Steve Johnston for any closing remarks.
Thank you M J and thank you all for joining US today, we look forward to speaking with you again on our third quarter call.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.