Q3 2022 Cincinnati Financial Corp Earnings Call

Ladies and gentlemen, thank you for standing by the conference will begin promptly at 11 O. Two eastern please continue to hold and thank you for your patience.

[music].

Good morning, and welcome to the Cincinnati Financial third quarter 2022 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by personal Starkey followed by zero.

After today's presentation there'll be an opportunity to ask questions.

To ask a question you May Press Star then one you touched home 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.

Hello. This is Dennis Mcdaniel Cincinnati financial Thank you for joining us for our third 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.

Find copies of any of these documents. Please visit our investor website Suntan Dot com slash investors. The shortest route to the information is the quarterly results link and 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 senior.

Senior Vice President of investments, Steve, So l'oreal and Cincinnati Insurance's, Chief claims officer, Mark Shambaugh, and senior Vice President 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 good morning, and thank you all for joining us today to hear more about our third quarter results.

In addition to market volatility affecting the valuation of our investment portfolio elevated inflation and natural catastrophe events affecting the industry also continued to pressure our property casualty insurance results.

We remain well positioned to improve performance through ongoing focus on successfully executing our profitable growth strategies.

Our insurance operations similar to how we have managed past challenges.

Our financial strength provides us the ability to maintain a long term view keeping a steady approach that can benefit all stakeholders.

We reported a net loss of $418 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 $114 million for the third quarter of 2022 was down $95 million from a year ago, including catastrophe losses that were $19 million higher on an after tax basis.

Our 103, 9% third quarter property casualty combined ratio was 11, three percentage points higher than the 92, 6% for the third quarter of last year.

Inflationary pressures led to higher estimated ultimate losses, and rising loss ratios on a current accident year basis.

We experienced another quarter of favorable development on prior accident years, it was less favorable than a year ago.

We continue to respond with underwriting selection and pricing actions. In addition to prudent reserving for estimated ultimate losses.

In addition to various premium rate increase filings with the states underwriters have increased expectations to add.

The address current inflationary trends in areas, such as risk selection criteria pricing policies and adjusting premium factors for changes in exposure.

Yeah.

Commercial umbrella loss experience has been elevated in recent quarters and it is challenging to determine relevant drivers given unusual business activity and general uncertainty as the pandemic waned.

For example, the third quarter of 2022 included three very large claims with estimated losses, averaging $9 million each while elevated losses. During the second quarter were driven more by a higher frequency of smaller claims.

We continue to carefully underwrite commercial umbrella risks and respond promptly to adequately reserved for emerging loss patterns, which we expect will eventually lead to a return to profitability for our commercial umbrella business.

Overall premium growth was strong and included average renewal price increases for each of our property casualty insurance segments.

Cincinnati insurance appointed agencies continued their outstanding production and our underwriters are focused on working to retain and grow profitable accounts, while addressing areas, where they judge pricing is not adequate segmenting opportunities on a policy by policy basis.

Consolidated property casualty net written premiums rose, 14% for the third quarter of 2022.

That included a 12% increase in third quarter renewal written premiums renewal written premiums, including 11% each for our commercial lines and personal lines insurance segments.

Higher renewal premiums included healthy increases for higher levels of insured exposures that are rising faster due to elevated inflation amounts for example, our commercial property premium adjustments for rising cost of building materials. So far this year are about double the level of last year.

Yeah.

In addition to exposure increases our commercial lines insurance segment continued to experience estimated average renewal price increases in the mid single digit percentage range somewhat higher than the second quarter.

Our excess and surplus lines insurance segment continued in the high single digit range also higher than the second quarter.

Personal lines average renewal price increases remained in the low single digit range with auto a little higher and homeowner or a little lower than the second quarter.

Personal auto insurance for the industry, including our book of business generally needs higher premium rates to achieve profitability.

Based on our rate filings that average low double digit rate increases for policies effective beginning January one 2023, we expect the full year of 2023 personal auto written premium effect will be an average premium rate increase of approximately 10%.

Uh huh.

The commercial line segment grew third quarter 2022, net written premium by 10% with a combined ratio of 99.0%, reflecting elevated inflation effects and catastrophe losses, one two percentage points higher than a year ago.

Yeah.

For our personal lines segment net written premium grew 15% mostly from our continued planned expansion of high net worth business produced by our agencies.

It's third quarter combined ratio of 104, 5% also reflected elevated installations effects, while the catastrophe loss ratio was four one percentage points lower than last year's third quarter.

Our excess and surplus line segment had a 93, 9% combined ratio and continued healthy growth with third quarter 2022, net written premiums increase of 16%.

Yeah.

Cincinnati re and Cincinnati global each experienced significant catastrophe losses from hurricane and that drove their underwriting loss for the quarter, we expect.

Catastrophe losses of that magnitude from time to time, our estimate as of September 30 was within our expectations of loss potential for events of Em's magnitude based on our models.

Results have modeled effects estimating probable maximum losses are disclosed in our annual report on Form 10-K.

Cincinnati re grew third quarter 2022, net written premiums by 51%, while Cincinnati Global grew 21% each having what we believe are good prospects for future profitability.

Our life insurance subsidiary continued to perform quite well along with growth in term life insurance earned premiums up 4%. It produced third quarter 2022, net income of $21 million and nearly tripled operating income of a year ago.

We continue to use the value creation ratio is our primary measure of long term financial performance.

VCR was negative eight 4% for the third quarter of 2022.

Net income before investment gains or losses made a positive contribution but it was again offset by lower investment valuations during the quarter.

Next Chief Financial Officer, Mike Sewell will highlight several other points, we consider important regarding our financial performance.

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

Investment income growth continued at a rate of 8% for the third quarter of 2022 compared with the third quarter of last year.

Dividend income rose, 8% for the quarter net equity securities purchased during the first nine months of 2022.

Total of $47 million.

Bond interest income grew 7% in the third quarter.

Pretax average yield of 4.08% for the fixed maturity portfolio was two basis points higher than a year ago.

The average pre tax yield for the total of purchase taxable and tax exempt bonds continue to rise, reaching 539% during the third quarter of 2022.

We again purchased additional fixed maturity securities with net purchases totaling $534 million during the first nine months of the year.

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

The overall net decrease was approximately $1 $2 billion before tax effects, including an additional $514 million of unrealized losses in our bond portfolio.

At the end of the quarter total investment portfolio net appreciated value was approximately $3 $5 billion. The equity portfolio was in a net gain position of $4 $5 billion, while the fixed maturity.

<unk> was in a net loss position of just under $1 $1 billion.

Cash flow continues to fuel growth of investment income cash flow from operating activities for the first nine months of 2022 generated $1 4 billion.

Compared with $1 $5 billion a year ago.

Regarding expense management, we continue to apply what we see is the appropriate balance between expense control and strategic investments in our business.

Third quarter 2022 property casualty underwriting expense ratio was one three percentage points lower than last year.

Most of the decrease was from lower accruals for profit sharing commissions for agencies.

Next I'll comment on loss reserves.

We continue to use a consistent approach that targets 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 consider 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.

And the first three quarters of 2022, our net addition to reserves was $814 million already exceeding our full year amounts for both 2021 and 2020.

We think that's a strong indication of the quality of our balance sheet.

During the third quarter 2022, we experienced $43 million of property casualty net favorable development on prior accident years that benefited the combined ratio by two four percentage points.

On an all lines basis by accident year net reserve development for the first nine months of 2022.

Favorable and included $94 million for 2021 $95 million for 2020.

That was partially offset by unfavorable $46 million in aggregate for accident years prior to 2020.

While we've recently reported significant unfavorable reserve development on prior accident years for commercial casualty lines of business.

The net $25 million for the first nine months of 2022 included $41 million for the commercial umbrella and net favorable amount of $16 million for other coverages included in commercial casualty.

Moving on to briefly highlight our consistent approach to capital management, we again repurchased shares that include maintenance intended to offset shares issued through equity compensation plans and importantly, we continue to believe we have plenty of financial flexibility.

And also believe that our financial strength remained in excellent shape.

During the third quarter 2022, we repurchased just under $2 1 million shares at an average price per share of $98 50.

As usual I'll conclude with a summary of third quarter contributions to book value per share. They represent the main drivers of our value creation ratio property casualty underwriting decreased book value by <unk> <unk> life insurance operations increased book value.

<unk> 14th.

Investment income other than life insurance and net of non insurance items added 42 cents.

Net investment gains and losses for the fixed income portfolio decreased book value per share by $2 58.

Net investment gains and losses for the equity portfolio decreased book value by $3 46.

And we declared 69 per share in dividends to shareholders. The net effect was a book value decrease of $6 29 per share during the third quarter to $60.01 per share now.

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

Thanks, Mike our fundamentals are strong and we Havent excellent book of business curated from our agencies best accounts.

We've clearly communicated across the organization the steps we need to take to improve challenged areas of our business and our underwriters are focused and aligned to those goals.

Our financial strength remains excellent and allows us to keep concentrating on our long term strategies and objectives of remaining a steady insurance market and producing shareholder value far into the future.

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

Anthony Please open the call for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you're using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question will come from Paul Newsome with Piper Sandler you May now go ahead.

Thank you and good morning.

I wanted to touch a little bit about maybe additional color on the deterioration in the accident year.

Perhaps in commercial but also in excess and surplus lines.

That's excluding the umbrella piece.

Can you talk about sort of what's going on there.

It's just a pure inflationary issue or is there something else in that.

Those pieces that.

You should know.

Hey, Paul Good morning. This is Steve spray, let me tackle the E&S piece first.

And I would say to you there.

It's that that book is about 90% casualty driven it's got inherent variability in it.

E&S casualty severity business.

And youre going to get it youre going to get noise from quarter to quarter.

I think it's more meaningful to look at it over a longer period.

Through nine months I think you can see that book continues to perform well the E&S company is coming off of nine years in a row of a 90 combined or better and performing well through the through nine months too, but I would say that similar to what we're seeing on the casualty side on the primary.

Business standard business.

We are seeing inflation.

Inflation or inflationary pressures, there and taking prudent reserves to recognize that also.

And maybe on the regular commercial business is there anything in their ability to mature.

Sure.

Inflation.

Yes, I think it's I think it's general inflation.

Think it's businesses.

Getting back to normal post COVID-19 or post pandemic.

And I think a lot of what we're seeing in the casualty book the inflationary pressure is primarily on that commercial umbrella line.

And then I was hoping you could talk a little bit about cash.

<unk> exposure in general.

Its been elevated the last couple of years.

And I noticed there was a fair amount of cat exposure, it's coming through.

Reported.

In the.

Since may we see global.

How do you think about sort of how should we think about the cat load going forward.

Yes.

On average what we've seen in the last couple of years about right.

Is that kind of the choice.

I think historically.

The cat load today is relatively low.

But it seems like it's kind of moved from them.

Kind of four to seven two.

We're around $7 12.

And how should we be thinking about that prospectively.

Paul This is Steve Johnston and I think you know.

We have a vibrant risk management process that we are.

Adhere to.

Do modeling of all of the particular risks.

I think we're in a very good position with our property in terms of cat expose pricing now I think that they have already been the prices have already been going up they will continue to go up I think if we look at <unk>, our Lloyd's syndicate, they've been a top quartile.

Underwriter over at Lloyd's in the last two years, even with the cats, so far through nine months. Their combined ratio is under 100, and we're seeing strong rate growth there and at the same time, they are diversifying into lines of business outside of.

The property related I think similarly, with Cincinnati re we saw.

Started that from scratch.

Several years ago, we've developed a very talented team that really looks to understand all of their risks, both quantitatively and qualitatively and where.

Very bullish on the opportunity for rate that.

Both will get as we.

Move into.

The year end renewals and into next year. So we feel good about.

Our property.

And catastrophe related exposures, I guess I would even throw in high net worth there, there's a little bit more exposure there, but we think with the type of underwriting that we do.

The quality of the homes, we're writing and the potential for higher rates at this point, we're very confident and bullish that we're going to get.

Really strong rate increases in all those areas.

Okay.

That's great.

I guess, but like my question really is is this.

Underwriting choice that you have seen a couple of years of elevated.

Cats, because you are moving into more property and stuff that has with catastrophe events or is this just a.

Normally the last couple of years.

Well I think I think our <unk>.

Actual cat losses over the last couple of years of really not been that outsized we've been in a position where years.

Years ago before we went into.

More diversification of our book.

A year with the heavy cat loss like this could put us over 100% and did if you look back to 2011.

And those type of years and now with I think.

A better spread of risk we can take body blows like this we're still under 100 year to date and feel that we.

We are bullish about the fourth quarter towards taking our streak of sub 100 combined ratios to 11th consecutive years.

I think over those that time period, we've outperformed the industry on a combined ratio basis by about five points and we've been growing at about half again the <unk>.

The rate this is in total.

It puts us in a good position to invest well and as you.

<unk> seen with the investment income.

As Mike described pre tax up 9% year to date amongst that dividend increase is up 13% the equity portfolios outperformed the S&P 500 up both on a year to date basis and on a five year trailing.

That drives our cash flow.

You know if you would look at our cash flow over time, it really has.

Increased if we would go back to 2012 or our cash flow from operations was $247 million. It has increased very steadily ever since then.

Up to about $1 1 billion in 2016, 2017 time period up to nearly $2 billion a year ago as Mike mentioned, we're at $1 4 billion through nine months compared to $1. Five so that's our strategy Paul we're going to grow over the long pole as Steve mentioned.

We think above the industry rate, we're going to do it with a combined ratio that is better.

To provide overwhelming claim service.

We're going to invest well, both with our fixed income and our equity portfolio generated a lot of cash that we can then returned to shareholders as we've done with our dividends.

Increasing them some 62 years in a row, we're going to continue to have a strong balance sheet is our reserves have developed favorably I think 33 years in a row.

That's just our basic strategy over time is to steadily.

Execute this.

Yeah.

Steadily execute our strategy and we think it will deliver value for our shareholders for a long time to come.

That makes a lot of sense. Thank you for the help as always.

Thank you Paul.

Yeah.

Our next question will come from Mike Zaremski with BMO you May now go ahead.

Hey, great good morning, so.

I guess piggybacking off the last question.

No.

It sounds like from your answer if we think about the outlook for Cincinnati re.

2023.

It feels like your appetite.

It remains.

Focus towards towards growth.

And that <unk> results of <unk>.

Last couple of years are.

Our.

Alright, I guess I.

I don't know put words in your mouth, but youre, okay with those results in.

No change in strategy there.

Yeah.

I would say that we'll see.

I would very much anticipate significant rate increases I think one thing to keep in mind to tie onto my comments are only about one third of the Cincinnati re written premiums which in total or.

About a little bit over half a billion through nine.

Nine months about one third of our property.

Another half of casualty and the other one six specialty so.

We will look.

Across the organization.

Very.

With a lot of scrutiny as to where we allocate capital.

In the property area relative to.

The type of pricing that we think we get.

On a risk adjusted basis for the contracts and policies that are offered to us. So.

I think.

With Cincinnati read Theyre running just over 100, I think of 103 nine or so inception to date.

And given the toughness of the reinsurance market over that period of time.

So I'm not disappointed with that we've been able to build a great team.

Without really any cost to the organization and are now well positioned I think as these prices firm two opportunities opportunistically and on a risk adjusted basis take advantage of it.

I guess just curious.

Since then or what gives you guys some diversification, but as the.

Combined ratio target for assisting every meaningfully lower than the company wide.

Range.

It's lower than the company range, yes.

Okay great.

I guess switching gears to commercial casualty and I appreciate your honesty and comments about the activity this quarter was.

A little unusual as it was larger claims versus you know.

Prior quarter, so it's a smaller claim so.

It sounds like.

There's not going to be.

Post pandemic hopefully.

Knock on wood.

Coughing it up to just.

Normalization and kind of.

Punky trends over the last couple of years. So it just it sounds like youre not rate it sounds like you're not going to take any meaningful terms and conditions are kind of strategic actions.

Rethink kind of multiyear policies or anything it just it sounds like kind of steady as she goes.

You're going to take some rates.

And nothing kind of beyond that.

To kind of take into account these unusual past couple of quarters or more.

Well, Greg we are going to take strong action I think the one thing we want to point out is just to recognize that we do have inherent volatility in our MRO umbrella book.

For 2019.

Our paid losses for umbrella were up 80% and then in 2018.

2018, and 2020, they were down 35%, so theres going to be some variability there, but we are all hands on deck and I think Steve spray.

Best to describe the specifics.

What we're gonna do to address.

Umbrella.

Yes, Thanks, Steve.

Again, Mike.

I don't want you to leave thinking that we're not taking.

<unk> on the umbrella book like Steve said it it's the sizable book for US it's over $500 million.

Written umbrella very well for many many years, we've got a lot of expertise on that front, we feel very good about about the line. It's performed very well matter of fact from 2017 through 2021, each year, our umbrella excess book.

Was sub 80 combined each year.

Definitely have inflationary pressure you can see it as Steve said in his remarks and in our in our Q and in our release as well the book needs right, it's getting rate not only from <unk>.

Specific rate increases that we're providing to the umbrella, but youre also getting lift.

From the underlying exposure changes as well because umbrella is priced off of your your underlying general liability and your underlying auto so we're getting.

We're getting lift there we analyze every single large loss, we have and look at it from a standpoint do we see any specific trends.

Whether it be geography class of business segment agency field Rep.

Don't see don't see any trends there I would tell you that our commercial umbrella is typically driven by the underlying commercial auto meaning those underlying commercial auto losses that will pierce up into the umbrella. So like Steve said, it's all hands on deck. It's.

Its risk selection, it's pricing and it's also looking at where we lay out the capacity different jurisdictions, whether it be individual state.

Or <unk>.

Segment of the segment of the market, so something that we've done well for a long time.

We think we can well not think I know, we can return it to profitability, we've taken prudent reserving.

Here with the uncertainty that we've experienced but.

Like Steve said, it's all hands on deck.

Yeah.

Okay. That's very helpful in may.

Maybe a similar question if I can sneak another one in on on personal lines. The data I guess, we can look at but cognizant that you are.

Tomorrow.

Our Super regional focus versus some of the national players.

<unk> been taking a little less rate than than many peers over the last year it sounds like.

Clearly you've stated in the last couple of quarters Youre going to start pushing the gas on taking rate in personal lines, especially in auto but.

Just curious when you speak to your agents Q do you expect.

The impact on your top line growth or is it going to change kind of your strategy near term and just curious if you also feel like some of the business you've you've put on the books over the last year just yet.

Probably isn't that profitable, but you are playing the long game.

Especially the high net worth space, so overtime Youll go.

Well exceed your cost of capital.

Yeah, Great question, Mike make sure I can get all that in my answer if I don't please give me a follow up but our we're about 50 50 now high net worth to middle market or middle market.

Business has been under pressure for several years.

As we have taken we have had to take specific rate actions and quite frankly in some specific states we had to be.

Pretty aggressive and that put our middle market personal lines growth under pressure.

Still under pressure, but we think we've seen the bottom new business for middle market is actually up through nine months of this year in personal lines.

The last three years on personal auto have performed very well.

We're definitely seeing the inflation.

Pressure this year, hence what Steve talked about as far as the rates that we're going to be planning on getting in 2023 high net worth is performing.

Very well.

The industry for high net worth over time has has outperformed middle market personal lines. The last several years have been.

I think a little difficult for the industry with cat.

But.

I think we are at.

Right place at the right time with with personal lines and I think the fact that we're 50 50 is unique in the market. It's differentiating our agents appreciate it.

And we're just getting more sophisticated and more segmented in our pricing as well.

I think the outlook for personal lines going forward is really really good as well.

You've got everything in there. Thank you.

Okay. Thanks, Mike.

Thanks, Mike.

Our next question will come from Greg Peters with Raymond James You May now go ahead.

Hey, good morning, this is actually sit on for Greg.

We've got a couple of questions on the reserve charges in commercial casualty and commercial autos. So hoping maybe you could unpack that for a minute and provide any additional information.

Sure Yeah, let me.

This is Mike let me start and then if.

<unk> received for anyone who would like to add any color, but for the quarter, we had favorable development of $43 million, which as I indicated was two four points for.

For the quarter and I would note that for the last several years, we've been in the range of $2 five to five points of favorable development. So the quarter is at the lower end of that range, but.

Right there with the range.

<unk> as you described every line had favorable development, except for the commercial casualty and then the auto for both commercial and personal related to the commercial casualty.

For the quarter that was unfavorable by 23 million.

That number 16 million related to commercial umbrella.

And actually for the quarter.

It was there were some reserve strengthening for 2021 and 2020 accident year within the older accident years for commercial umbrella.

Actually was was favorable.

A little bit of the opposite when you look at it on a year to date basis, our year to date basis.

We had $143 million of favorable development in total commercial casualty on a year to date basis was unfavorable by $25 million.

When you unpack that.

Umbrella was unfavorable by $41 million, while all the other commercial casualty was favorable by $16 million.

And then if you look at that commercial casualty.

By accident year, it was favorable on a year to date basis for both 2021 and 2020.

And then it was unfavorable for 19 accident year 19.

And prior to that.

It probably would also make the same comment if I think about <unk>.

Commercial auto personal auto both on a year to date basis and a quarterly.

On a quarterly basis that was unfavorable for both of those time periods, but then when you look at the accident years.

It was the unfavorable development was primarily in the 2019 and previous accident years, but it was favorable for accident year 2021 2020.

Those were a lot of numbers throughout and hopefully impact that at least.

But if there is any other questions or.

Anyone else here, we'd like to expand.

Yeah.

Got it thank you.

Yeah.

Our next question will come from Scott <unk> with RBC capital markets insurance.

You May now go ahead.

Pardon me Scott your line may be muted.

Hello, Good morning.

Just wanted to touch base.

I just wanted to touch base real quick on the commercial umbrella you gave us some good detail on that and you mentioned that the so it was more of a severity issue this quarter as opposed to second quarter's frequency I'm. Just wondering if you can talk about hum.

How much.

The deviation between the frequency between second quarter, and third quarter and I'm assuming that the.

The severity was that was that just litigation.

Adverse litigation.

That you saw on that book.

I don't have the exact frequency numbers it was less frequency for the third quarter.

I don't know that I would necessarily call it litigation as far as much as I would just say we're getting some claims in and we go to think about where we should set the reserve.

It is just larger than.

These are larger claims than we had second quarter. It was we're just trying to give some color that it was more frequency driven for commercial umbrella in the second quarter and more severity driven and the third.

Okay, Yeah, that's fair enough.

And then I just wanted to touch base real quick on the.

The buybacks you are pretty pretty active again for the second consecutive quarter, a fair amount of couple of hundred million dollars and.

So is this is this something that you might be.

More more little more assertive or little more regular on or is this I know you mentioned.

Maintenance buybacks it seems like it's a little bit more than that at least a couple over the last couple of quarters, but if you could just give us your updated thoughts on where you were you were certainly enough for the share count to be down year over year and to make a little bit of a difference, but anything you can offer there.

Sure no.

This is Mike I would say our.

Our thought process around that really has not changed so also call it a maintenance buyback.

Yes, you are correct for the quarter and for the year now.

Now, we have repurchased about $3 6 million shares.

That's higher than the maintenance, but.

For the current year, but if you go back and look at the last several years.

It has bounced around a little bit.

A couple of years ago, we only purchased repurchased 600000 shares so.

Kind of on average I will say that it.

It will cover our maintenance if you go back to.

When we had some larger buybacks back.

Back in about 2007 2008, our total share count is just slightly below where we were at that time. So we've kind of maintained a certain level.

If it's down.

123 million shares from that time period.

It's probably not very significant when you're when you've got 160 million shares outstanding So I would still call it a maintenance.

Maintenance buyback, but we'll look at it quarter to quarter end.

Maybe higher maybe lower.

Okay.

It makes sense I would just add one last one too on the expense ratio. I mean, you made the comment had a lot of it was just driven by the slower lower contingent commissions that were paid.

But I know you mentioned, a few quarters ago, but the target was to get the expense ratio down to 30% and just wondering if you thought that might be realistic to happen in 2023 based on what Youre seeing now.

Well it's.

It's something that we continue to work on so of course, we want our <unk>.

<unk> is to be below.

30 expense ratio, but if we're not below a 30, because we are paying more commissions profit sharing to agencies, that's probably a good thing overall, so I'll I'll still take that but we would still like to have a goal of being profitable.

A lot of commissions and being under a 30.

It would be a great way to do it and so we will still keep working on our expenses and trying to have the increase of.

Expenses be slower than the increase in premiums.

Yeah, Gary on them more than happy to pay the expense if you get the get the good business, but that's helpful. Thanks a lot.

You bet. Thank you for the questions.

Our next question will come from Meyer Shields with <unk>.

You May now go ahead.

Great. Thanks, good morning, everyone.

Good morning America.

Sorry, good morning.

I guess the question that I'm hearing a lot is.

If there are issues in umbrella.

Is there any concern that that is sort of the.

The initial reflection of another wave of social inflation that will ultimately impact.

Casualty lines, because it sounds like you're still confident in reserve adequacy or redundancy elsewhere and I was wondering how youre thinking about that.

Yes.

Matt It's a good question I think that it is a reflection of really all types of inflation.

I think that.

When you look at upper layers, there's a leveraged impact.

And then as you go up in layers for a constant inflation rate it's.

It has a higher impact on each layers you go up and I think it's generally because those claims that otherwise would've been just below the attachment point now in plate into the layer as well as the normal inflation on the layer. So I think it's something that we keep it.

A close eye on trying to measure tried to price for go through everything that Steve mentioned already in terms of.

All hands on deck from underwriting to pricing to claims.

To make sure that we're understanding.

The impacts on umbrella and also recognizing that there is volatility there is as I mentioned, a little bit earlier in terms of what we've seen a variation of.

Payments on commercial umbrella from one year to the next.

Theres just going to be some natural variation, but in this inflationary time period.

It calls for a very much a heightened sense of urgency and intensity from every area of our company.

Okay.

That is helpful.

Think mathematically similar question.

When we look at the large lock date up a combined loss of Dover.

Between one and $5 million and $5 million and higher in commercial is up 50% year over year.

Much more than in the second quarter is there any way of.

Getting a sense as to how much.

That increase in larger losses is just a function of in place and putting some losses over that line.

That's part of our analysis mayor and we'll be looking at that.

Where we're seeing it as Steve mentioned in terms of geographic areas in.

Sure.

The various limits that we write which are generally relative I think to most in the industry.

Mahler layers.

But all of that we need to take a look at it it is difficult to.

Ascertain or really specifically.

<unk> two inflation given the inherent volatility we see in the book.

Okay.

Okay, and then one.

Got it very helpful. I guess, one final question does anything in.

Third quarter results I guess on the cat side.

<unk> want to change the structure of your reinsurance protection in 2023.

Barry This is Steve spray I would say.

No nothing that we saw in the third quarter.

Lend us to.

Change the structure I think one of the good things with that is.

It's pretty common knowledge out there that you hear that.

Many service market is going to harden.

We believe we're in a really good position relatively speaking for for that.

We're just in the middle of our property all of our.

Reinsurance renewals.

Now, but I think the good thing is as we have performed well for our reinsurers over time, we take a long term approach in partnership with them and we've got the financial strength and financial flexibility too.

If we need to take more co co participation in balanced debt right.

We're in an enviable position I think that we've got the financial strength to do that.

Okay. Thank you very much that's very helpful.

Okay.

Again, if you have a question. Please press Star then one.

Our next question will come from Chris Carter with Bank of America.

You May now go ahead.

Hi, everyone.

Good morning <unk>.

I have a quick question on rate versus trend in commercial lines I mean, obviously.

Loss cost trends with kind of proceeded.

The challenging this quarter and you mentioned that your commercial pricing.

Higher versus <unk> 22.

You see the spread between your pricing versus loss cost trend and <unk> 22 versus earlier in the year end.

Are there any color that you can give us on how that might evolve going forward, just given where inflation is trending and you.

Our continued pricing actions.

Okay.

Good question.

For the commercial lines segment, we are in a position as we define the loss costs versus.

<unk>.

Premium that we can stay ahead of the trend we are very prospective we're looking out into the prospective policy periods in terms of estimating how loss causes loss costs will rise versus the type of premium that we think we're going to get and we think for the sector.

We should be in a position to be ahead of loss costs. Obviously, some some of the lines of business are more challenging than others, but I think in.

Total that we can get there I think.

When you look at our X cat accident year combined ratio of 91, one well that's a deterioration from where it was in 2021 that was an awfully.

Tough comp.

The best accident year.

Ex cat that we've ever put in for the full year. It was accident year ex cat combined ratio of 86 two.

The current 91, one that we have relative to our accident year ex cat for every year from.

2012 through 2019 is actually better than.

And then every one of those except for 2016, where we were at 98. So just.

Three basis points lower there so I think given where we are.

Given the trends that we're estimating recognizing the challenge that needs to be met with not only rate, but underwriting and again every aspect of every part of the company.

Coming together to do their part too.

Manage the loss costs lower.

We feel that we're in a good position for the sector as we go into 2023.

Thank you.

I had a quick question on the <unk>.

<unk> trends of well I think last quarter, you all had mentioned that more gradual CT reopening had driven a little bit of volatility in those losses.

Curious just is that kind of period of closures gets further behind us if that continue to drive some issues this quarter.

Gotten better.

I think it's still uncertain.

Hope that it.

Especially given our commentary on frequency and the umbrella line decreasing here into the third quarter that is slowing down but that is an uncertain.

Area that I think ourselves and really the industry in general.

We will be keeping an eye on.

Thank you.

Thank you.

Yeah.

Our next question will come from Harry Fong with MTM Partners you May now go ahead.

Thank you good morning.

Steve and Steve.

I heard.

Quite a bit about the umbrella line.

And the longer term trend.

From 2017 through 2021, however, we did see if I recall correctly.

Jump in frequency.

The fourth quarter of 16 or first quarter of 17 that lag.

So a very similar discussion as.

But we've been hearing this morning.

Can you characterize what you saw in the large frequencies back then the what is going on today and.

Are there significant differences.

May require you to implement changes.

That will take.

Longer to improve the current situation.

Yes, Harry you're very astute in recognizing that I think.

We have seen with the volatility in the line over time.

Ups and downs in terms of the performance.

I would think one thing.

That was maybe a little bit different than than now as we were seeing the paid to encourage encourage ratio rising.

Currently that that isn't the case I think we're reserving.

More now and we.

Were then relative to <unk>.

The exposure so it's a slight difference but to be honest I think it's the same approach.

That will take that we did back then that.

That worked out to be successful really.

And what I would consider to be not that long of a time period.

Hey, Kurt.

What drove you to increase the reserves just the macro environment rather than.

Experience.

I would say, it's a little bit of both I would say, it's a little bit of both.

That's great. Thank you.

Thank you Harry.

Yes.

This concludes our question and answer session I.

I would like to turn the conference back over to Steve Johnston CEO for any closing remarks.

Thank you Anthony and thanks to all of you for joining US today, we look forward to speaking with you again on our fourth quarter call.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

[music].

Good morning, and welcome to the Cincinnati Financial third quarter 2022 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by personnel Starkey followed by zero.

After today's presentation there'll be an opportunity to ask questions.

To ask a question you May Press Star then one you touched home 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 with Dennis Mcdaniel Investor Relations Officer. Please go ahead.

Hello. This is Dennis Mcdaniel Cincinnati financial Thank you for joining us for our third 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.

If I 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 and then 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.

Senior Vice President of investments, Steve, So l'oreal, and Cincinnati Insurance's, Chief claims officer, Mark Shambaugh and <unk>.

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.

Good morning, and thank you all for joining us today to hear more about our third quarter results.

In addition to market volatility affecting the valuation of our investment portfolio elevated inflation and natural catastrophe events affecting the industry also continued to pressure our property casualty insurance results.

We remain well positioned to improve performance through ongoing focus on successfully executing our profitable growth strategies for our insurance operations.

Operations similar to how we have managed past challenges.

Our financial strength provides us the ability to maintain a long term view keeping a steady approach that can benefit all stakeholders.

We reported a net loss of $418 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 $114 million for the third quarter of 2022 was down $95 million from a year ago, including catastrophe losses that were $19 million higher on an after tax basis.

Our 103, 9% third quarter property casualty combined ratio was 11, three percentage points higher than the 92, 6% for the third quarter of last year.

Inflationary pressures led to higher estimated ultimate losses, and rising loss ratios on a current accident year basis, while we experienced another quarter of favorable development on prior accident years, it was less favorable than a year ago.

We continue to respond with underwriting selection and pricing actions. In addition to prudent reserving for estimated ultimate losses.

In addition to various premium rate increase filings with the states underwriters have increased expectations to add.

Address current inflationary trends in areas, such as risk selection criteria pricing policies and adjusting premium factors for changes in exposure.

Yeah.

Commercial umbrella loss experience has been elevated in recent quarters, and it's challenging to determine relevant drivers given unusual business activity and general uncertainty as the pandemic waned.

For example, the third quarter of 2022 included three very large claims with estimated losses, averaging $9 million each while elevated losses. During the second quarter were driven more by a higher frequency of smaller claims.

We continue to carefully underwrite commercial umbrella risks and respond promptly to adequately reserved for emerging loss patterns, which we expect will eventually lead to a return to profitability for our commercial umbrella business.

Overall premium growth was strong and included average renewal price increases for each of our property casualty insurance segments.

Cincinnati insurance appointed agencies continued their outstanding production and our underwriters are focused on working to retain and grow profitable accounts, while addressing areas, where they judge pricing is not adequate segmenting opportunities on a policy by policy basis.

Consolidated property casualty net written premiums rose, 14% for the third quarter of 2022.

That included a 12% increase in third quarter renewal written premiums renewal written premiums, including 11% each for our commercial lines and personal lines insurance segments.

Higher renewal premiums included healthy increases for higher levels of insured exposures that are rising faster due to elevated inflation amounts for example, our commercial property premium adjustments for rising cost of building materials. So far this year are about double the level of last year.

Okay.

In addition to exposure increases our commercial lines insurance segment continued to experience estimated average renewal price increases in the mid single digit percentage range somewhat higher than the second quarter.

Our excess and surplus lines insurance segment continued in the high single digit range also higher than the second quarter.

Personal lines average renewal price increases remained in the low single digit range with auto a little higher and homeowner a little lower than the second quarter.

Personal auto insurance for the industry, including our book of business generally needs higher premium rates to achieve profitability.

Based on our rate filings that average low double digit rate increases for policies effective beginning January one 2023, we expect the full year 2023 personal auto written premium effect will be an average premium rate increase of approximately 10%.

Uh huh.

The commercial lines segment grew third quarter 2022, net written premium by 10% with a combined ratio of 99.0%, reflecting elevated inflation effects and catastrophe losses, one two percentage points higher than a year ago.

For our personal lines segment net written premium grew 15% mostly from our continued planned expansion of high net worth business produced by our agencies.

It's third quarter combined ratio of 104, 5% also reflected elevated inflation effects, while the catastrophe loss ratio was four one percentage points lower than last year's third quarter.

Our excess and surplus line segment had a 93, 9% combined ratio and continued healthy growth with third quarter 2022, net written premiums increase of 16%.

Cincinnati re and Cincinnati global each experienced significant catastrophe losses from hurricane and that drove their underwriting loss for the quarter.

We expect catastrophe losses of that magnitude from time to time.

Our estimate as of September 30 was within our expectations of loss potential for events of Aeons magnitude based on our models.

Results have modeled effects estimating probable maximum losses are disclosed in our annual report on Form 10-K.

Cincinnati re grew third quarter 2022, net written premiums by 51%, while Cincinnati Global grew 21% each having what we believe are good prospects for future profitability.

Our life insurance subsidiary continued to perform quite well along with growth in term life insurance earned premiums up 4%. It produced third quarter 2022, net income of $21 million and nearly tripled operating income of a year ago.

We continue to use the value creation ratio is our primary measure of long term financial performance.

<unk> was negative eight 4% for the third quarter of 2022.

Net income before investment gains or losses made a positive contribution but it was again offset by lower investment valuations during the quarter.

Next Chief Financial Officer, Mike Sewell will highlight several other points, we consider important regarding our financial performance.

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

Investment income growth continued at a rate of 8% for the third quarter of 2022 compared with the third quarter of last year.

Dividend income rose, 8% for the quarter net equity securities purchased during the first nine months of 2022 totaled $47 million.

Bond interest income grew 7% in the third quarter.

Pretax average yield of 4.08% for the fixed maturity portfolio was two basis points higher than a year ago.

The average pre tax yield for the total of purchase taxable and tax exempt bonds continue to rise, reaching 539% during the third quarter of 2022.

We again purchased additional fixed maturity securities with net purchases totaling $534 million during the first nine months of the year.

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

The overall net decrease was approximately $1 $2 billion before tax effects, including an additional $514 million of unrealized losses in our bond portfolio.

At the end of the quarter total investment portfolio net appreciated value was approximately $3.5 billion. The equity portfolio was in a net gain position of $4 $5 billion, while the fixed maturity.

<unk> was in a net loss position of just under $1 1 billion.

Cash flow continues to fuel growth of investment income cash flow from operating activities for the first nine months of 2022 generated $1 $4 billion compared.

Compared with $1 5 billion.

A year ago.

Regarding expense management, we continue to apply what we see is the appropriate balance between expense control and strategic investments in our business.

Third quarter 2022 property casualty underwriting expense ratio was one three percentage points lower than last year.

Most of the decrease was from lower accruals for profit sharing commissions for agencies.

Next I'll comment on loss reserves, we continue to use a consistent approach that targets net amounts in the upper half of the Actuarially estimated range of net loss and loss expense reserves.

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

And the first three quarters of 2022, our net addition to reserves was $814 million already exceeding the full year amounts for both 2021 and 2020.

We think that's a strong indication of the quality of our balance sheet.

During the third quarter 2022, we experienced $43 million of property casualty net favorable development on prior accident years that benefited the combined ratio by two four percentage points.

On an all lines basis by accident year net reserve development for the first nine months of 2022 was favorable and included $94 million for 2021 $95 million for 2020 that was partially offset by unfavorable 46 million.

In aggregate for accident years prior to 2020.

Well, we've recently reported significant unfavorable reserve development on prior accident years for commercial casualty lines of business.

The net $25 million for the first nine months of 2022 included $41 million for the commercial umbrella and net favorable amount of $16 million for other coverages included in commercial casualty.

Moving on to briefly highlight our consistent approach to capital management, we again repurchased shares that include maintenance intended to offset shares issued through equity compensation plans importantly, we continue to believe we have plenty of financial flexibility.

And also believe that our financial strength remained in excellent shape.

During the third quarter 2022, we repurchased just under $2 1 million shares at an average price per share of $98 50.

As usual I'll conclude with a summary of third quarter contributions to book value per share. They represent the main drivers of our value creation ratio property casualty underwriting decreased book value by 12 Stones life insurance operations increased book.

<unk> 14.

Investment income other than life insurance and net of non insurance items added 42.

Net investment gains and losses for the fixed income portfolio decreased book value per share by $2 58.

Net investment gains and losses for the equity portfolio decreased book value by $3 46.

And we declared 69 per share in dividends to shareholders. The net effect was a book value decrease of $6 29 per share during the third quarter to $60.01 per share.

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

Thanks, Mike our fundamentals are strong and we Havent excellent book of business curated from our agencies best accounts.

We've clearly communicated across the organization the steps we need to take to improve challenged areas of our business and our underwriters are focused and aligned to those goals.

Our financial strength remains excellent and allows us to keep concentrating on our long term strategies and objectives of remaining a steady insurance market and producing shareholder value far into the future.

As a reminder, with Mike and me today are Steve spray, Steve Soleri.

Mark Shambo and Theresa Hoffer.

Anthony Please open the call for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you're using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question will come from Paul Newsome with Piper Sandler you May now go ahead.

Thank you and good morning.

I wanted to touch a little bit about maybe additional color on the.

Deterioration in the accident year.

Perhaps in commercial but also in excess and surplus lines.

That's excluding the umbrella piece.

Can you talk about sort of what's going on there for months.

It's just a pure inflationary issue or is there something else in.

In that.

Pieces that.

You Shouldnt.

Hey, Paul Good morning. This is Steve spray, let me tackle the E&S piece first.

And I would say to you there.

It's that that book is about 90% casualty driven.

<unk> got inherent variability in it.

E&S casualty severity business.

And youre going to get it youre going to get noise from quarter to quarter.

I think it's more meaningful to look at it over a longer period.

And through nine months I think you can see that book continues to perform well the E&S company is coming off of nine years in a row, the 90, combined or better and performing well through the through nine months too, but I would say that similar to what we're seeing on the casualty side on the <unk>.

Primary business standard business.

We are seeing inflation.

Inflation or inflationary pressures, there and taking prudent reserves to recognize that also.

And maybe on the regular commercial business is there anything in there other than pure.

Or just general inflation.

Yes, I think it's I think it's general inflation.

Its businesses.

Getting back to normal post COVID-19 or post pandemic.

And I think a lot of what we're seeing in the casualty book the inflationary pressure is primarily on the commercial umbrella line.

And then I was hoping you could talk a little bit about cat exposure in.

General.

Its been elevated the last couple of years.

And I noticed there was a fair amount of cat exposure, it's coming through.

Reported.

In the.

Global.

Thank you.

Do you think about sort of how should we think about the cat load going forward.

Kind of on average what we've seen in the last couple of years about right.

Is that kind of the choice.

Cincinnati is made.

Historically.

The cat one today is relatively low.

But it seems like it's kind of moved from them.

Kind of four to seven two.

We're around $7 12.

And how should we think about that prospectively.

Paul This is Steve Johnston and I think you know.

We have a vibrant risk management process that we are.

Adhere to.

Do modeling of all of the particular risks.

I think we're in a very good position with our property in terms of cat expose pricing now I think that they have already been the prices have already been going up. They will continue to go up I think if we look at <unk>, our Lloyd's syndicate and they've been a top quartile.

Underwriter over at Lloyd's in the last two years, even with the cats. So far in the nine months their combined ratio is under 100, and we're seeing strong rate growth there and at the same time, they are diversifying into lines of business outside of <unk>.

The property related I think similarly, with Cincinnati re we have.

Started that from scratch.

Just several years ago, we've developed a very talented team that really looks to understand all of their risks, both quantitatively and qualitatively and <unk>.

Very bullish on the opportunity for rate that.

Both will get as we.

Move into.

The year end renewals and into next year. So we feel good about.

Our property.

And catastrophe related exposures, I guess I would even throw in high net worth there, there's a little bit more exposure there, but we think with the type of underwriting that we do.

The quality of the homes, we're writing and the potential for higher rates at this point, we're very confident and bullish that we're going to get.

Really strong rate increases in all those areas.

Yes.

Great.

But my question really is sort of is this.

Underwriting choice that you've seen a couple of years of elevated.

Cats, because you are moving into more property and stuff that has with catastrophe events or is this just a.

Anomaly for last couple of years.

Well I think I think our actual cat losses over the last couple of years of really not been that outsized we've been in a position where.

Years ago before we went into more.

More diversification of our book.

A year with the heavy cat loss like this could put us over 100% and did if you look back to 2011.

And those type of years.

And now with I think.

Better spread of risk we can take body blows like this we're still under 100 year to date and feel that we.

We're bullish about the fourth quarter towards taking our streak of sub 100 combined ratios to 11th consecutive years.

I think over those that time period, we've outperformed the industry on a combined ratio basis by about five points and we've been growing at about half again the.

The rate this is in total which puts us in a good position to invest well and as you've seen with the investment income.

As Mike described pre tax up 9% year to date amongst that dividend increase is up 13%.

The equity portfolios outperformed the S&P 500, both on a year to date basis and on a five year trailing that drives our cash flow.

If you would look at our cash flow over time, it really has.

Increased if we would go back to 2012 or our cash flow from operations was $247 million increased very steadily ever since then.

Up to about $1 1 billion in 2016, 2017 time period up to nearly $2 billion a year ago as Mike mentioned, we're at $1 4 billion through nine months compared to $1. Five so that's our strategy Paul we're going to grow over the long pole as Steve mentioned.

We think above the industry rate, we're going to do it with a combined ratio that is better.

To provide overwhelming claim service.

We're going to invest well, both with our fixed income and our equity portfolio generated a lot of cash that we can then returned to shareholders as we've done with our dividends.

Increasing them some 62 years in a row, we're going to continue to have a strong balance sheet is our reserves have developed favorably I think 33 years in a row.

That's just our basic strategy over time is to steadily.

Execute this.

<unk>.

Steadily execute our strategy and we think it will deliver value for our shareholders for a long time to come.

That makes a lot of sense. Thank you for the help as always.

Thank you Paul.

Okay.

Our next question will come from Mike Zaremski with BMO you May now go ahead.

Hey, great good morning, so.

I guess piggybacking off the last question.

No.

It sounds like from your answer if we think about the outlook for Cincinnati re.

2023.

It feels like your appetite.

It remains.

Focus towards towards growth.

And that Cincinnati <unk> results over the last couple of years are.

Sure.

Alright, I guess I don't know put words in your mouth, but youre, okay with those results in hand.

No change in strategy there.

I would say that we'll see.

I would very much anticipate significant rate increases I think one thing to keep in mind to tie onto my comments are only about one third of the Cincinnati re written premiums which in total are.

You know about a little bit over half a billion through nine.

Nine months about one third of our property.

Another half for casualty and the other one six specialty so.

We will look.

Across the organization.

Very.

With a lot of scrutiny as to where we allocate capital.

In the property area relative to.

The type of pricing that we think we get.

On a risk adjusted basis for the contracts and policies that are offered to us. So.

I think.

With Cincinnati read Theyre running just over 100, I think 103, nine or so inception to date and given the toughness of the reinsurance market over that period of time, yes, I'm not disappointed with that we've been able to build a great team.

Without really any cost to the organization and are now well positioned I think as these prices firm two opportunities opportunistically and on a risk adjusted basis take advantage of it.

I guess just curious.

Since then or what gives you guys some diversification, but as the <unk>.

Combined ratio target for assisting every meaningfully lower than the company wide.

Range.

It's lower than the company range, yes.

Okay.

Great.

I guess switching gears to commercial casualty.

Right your honesty and comments about the activity this quarter was.

A little unusual as it was larger claims versus you know.

Prior quarter, so it's a smaller claims so it.

Sounds like the.

There's not going to be.

Post pandemic hopefully.

Im glad youre.

Youre coughing it up to just.

Normalization and kind of.

Funky trends over the last couple of years. So it just it sounds like youre not rate it sounds like youre not going to take any meaningful terms and conditions are kind of strategic actions.

Rethink kind of multiyear policies or anything it just it sounds like kind of steady as she goes.

You're going to take some rate and.

And nothing kind of beyond that.

To kind of.

Taking into account these unusual past couple of quarters or Omar.

Well, Greg we are going to take strong action I think the one thing we want to point out is just to recognize that we do have inherent volatility in our umbrella umbrella book.

For 2019.

<unk> paid losses for umbrella were up 80% and then in 2018.

2018, and 2020, they were down 35%, so theres going to be some variability there, but we are all hands on deck and I think Steve spray, it's best to describe the specifics.

What we're going to do to address.

Umbrella.

Yes, Thanks, Steve.

Morning again, Mike.

Yes, I don't want you to leave thinking that we're not taking.

Action on the umbrella book like Steve said it it's the sizable book for US it's over $500 million.

We've written umbrella very well for many many years, we've got a lot of expertise on that front, we feel very good about.

The line, it's performed very well matter of fact from 2017 through 2021, each year, our umbrella excess book.

Sub 80 combined each year.

Definitely have inflationary pressure you can see it as Steve said in his remarks and in our in our Q and in our release as well the book needs right.

Its getting right not only from.

The specific rate increases that we're providing to the umbrella, but youre also getting lift.

From the underlying exposure changes as well because umbrella is priced off of your your underlying general liability and your underlying auto so we're getting.

We're getting lift there we analyze every single large loss, we have and look at it from a standpoint do we see any specific trends.

Whether it be geography class of business segment agency field Rep.

Don't see any don't see any trends there I would tell you that our commercial umbrella is typically driven by the underlying commercial auto meaning those underlying commercial auto losses that will Pierce up.

Into the umbrella so like Steve said, it's all hands on deck it's.

Its risk selection, it's pricing and it's also looking at where we lay out the capacity different jurisdictions, whether it be individual state.

Or <unk>.

Segment of the segment of the market, so something that we've done well for a long time.

We think we can well not think I know, we can return it to profitability, we've taken prudent reserving.

Here with the uncertainty that we've experienced.

Like Steve said, it's all hands on deck.

Yeah.

Okay. That's very helpful in may.

Maybe a similar question if I can sneak another one in on on personal lines. The data I guess, we can look at but cognizant that you are.

Sure.

Superregional focus versus some of the national players.

<unk> been taking a little less rate than than many peers over the last year it sounds like.

Clearly you've stated in the last couple of quarters Youre going to start pushing the gas on taking rate in personal lines, especially in auto but.

Just curious when you speak to your agents do you expect.

An impact on your top line growth or is it going to change kind of your strategy near term and just curious if you also feel like some of the business.

You've put on the books over the last year just.

Probably isn't that profitable, but you are playing the long game.

Especially the high net worth space, so overtime youll.

Well exceed your cost capital thanks.

Yeah, Great question, Mike make sure I can get all of that in my answer if I don't please give me a follow up but our we're about 50 50 now high net worth to middle market or middle market.

Business has been under pressure for several years.

As we have taken we have had to take specific rate actions and quite frankly in some specific states we had to be.

Pretty aggressive and that put our middle market personal lines growth under pressure.

Still under pressure, but we think we've seen the bottom new business for middle market is actually up through nine months of this year in personal lines.

The last three years on personal auto.

Have performed very well.

We're definitely seeing the inflation.

Pressure this year, hence what Steve talked about as far as the rates that we're going to be planning on getting in 2023 high net worth is performing.

Very well.

The industry for high net worth overtime has has outperformed middle market personal lines. The last several years have been.

I think a little difficult for the industry with cat.

But.

I think we are at.

Right place at the right time with with personal lines and I think the fact that we're 50 50 is unique in the market. It's differentiating our agents appreciate it.

We're just getting more sophisticated and more segmented in our pricing as well.

I think the outlook for personal lines.

Going forward is really really good as well.

You've got everything in there. Thank you.

Okay. Thanks, Mike.

Thanks, Mike.

Our next question will come from Greg Peters with Raymond James You May now go ahead.

Hey, good morning, this is actually sit on for Greg.

We got a couple of questions on the reserve charges in commercial casualty and commercial auto so, hoping maybe you could unpack that for a minute and provide any additional information.

Sure Yeah, let me.

This is Mike let me start and then if.

<unk> received for anyone would like to add any color, but for the quarter, we had favorable development of $43 million, which as I indicated was two four points for.

For the quarter and I would note that for the last several years.

I've been in the range of $2 five to five points of favorable development. So the quarter is at the lower end of that range, but.

Right there with the range.

<unk> as you described every line had favorable development, except for the commercial casualty and then the auto for both commercial and personal related to the commercial casualty.

For the quarter that was unfavorable by $23 million.

That number 16 million related to commercial umbrella.

And actually for the quarter.

It was there was some reserve strengthening for 2021 and 2020 accident year within the older accident years for commercial umbrella.

Actually was was favorable.

That's a little bit of the opposite when you look at it on a year to date basis, our year to date basis.

We had $143 million of favorable development.

In total commercial casualty.

On a year to date basis was unfavorable by $25 million.

When you unpack that.

Umbrella was unfavorable by $41 million, while all the other commercial casualty was favorable by $16 million.

And then if you look at that commercial casualty.

By accident year, it was favorable on a year to date basis for both 2021 and 2020.

And then it was unfavorable for 19 accident year 19.

And prior to that.

I probably would also make the same comment if I think about <unk>.

Commercial auto personal auto both on a year to date basis and a quarterly.

On a quarterly basis that was unfavorable for both of those time periods, but then when you look at the accident years. It was.

The unfavorable development was primarily in the 2019.

And previous accident years, but it was favorable for accident year 2021 2020.

Those were a lot of numbers.

Throughout and hopefully impact that at least.

But if there is any other questions or.

Anyone else here, we'd like to expand.

Yeah.

Got it thank you.

Our next question will come from Scott <unk> with RBC capital markets insurance and you May now go ahead.

Pardon me Scott your line may be muted.

Hello, Good morning.

Just wanted to touch base.

Morning, I just wanted to touch base real quick on the commercial umbrella you gave some good detail on that and you mentioned that the.

So it was more of a severity issue this quarter as opposed to second quarter's frequency I'm. Just wondering if you can talk about how.

How much.

The deviation between the frequency between second quarter, and third quarter and I'm assuming that.

The severity was that was that just litigation.

Adverse litigation that.

That you saw on that book.

I don't have the exact frequency numbers it was less frequency for the third quarter.

I don't know that I would necessarily call it litigation as far as much as I would just say.

We're getting some claims in and we go to think about where we should set the reserve.

It is just larger than.

<unk>.

These are larger claims than we had second quarter. It was we're just trying to give some color that it was more frequency driven for commercial umbrella in the second quarter and more severity driven in the third.

Okay, Yeah, that's fair enough.

And then I just wanted to touch base real quick on that.

Buybacks, you are pretty pretty active again for the second consecutive quarter, a fair amount of couple of hundred million dollars.

So is this is this something that you might be.

More more more sort of or a little more regular on.

Or is this I know you mentioned.

Maintenance buybacks it seems like it's a little bit more than that at least a couple over the last couple of quarters, but if you could just give us your updated thoughts on where you were you were certainly enough for the share count to be down year over year and to make a little bit of a difference, but anything you can offer there.

Sure.

This is Mike I would say our.

Our thought process around that really has not changed so also call it a maintenance buyback.

Yes, you are correct for the quarter and for the year now.

Now, we have repurchased about $3 6 million shares that's.

That's higher than the maintenance, but.

For the current year, but if you go back and look at the last several years.

It has bounced around a little bit.

A couple of years ago, we only purchased repurchased 600000 shares so.

Kind of on average I will say that it.

It will cover our maintenance if you go back to.

When we had some larger buybacks back.

Back in about 2007 2008, our total share count is just slightly below where we were at that time. So we've kind of maintained a certain level.

If it's down.

123 million shares from that time period.

It's probably not very significant when you're when you've got 160 million shares outstanding So I would still call it a maintenance.

Maintenance buyback, but it's we'll look at it quarter to quarter end.

Maybe higher maybe lower.

Okay.

Makes sense I just had one last one too on the expense ratio I mean, you made the comment had a lot of it was just driven by the slower lower contingent commissions that were paid.

But I know you mentioned, a few quarters ago, but the target was to get the expense ratio down to 30% and just wondering if you thought that might be realistic to happen in 2023 based on what Youre seeing now.

Well, yes.

Net we continue to work on so of course, we want.

Target is to be below.

30 expense ratio, but if we're not below a 30, because we are paying more commissions profit sharing to agencies, that's probably a good thing overall, so I'll I'll still take that but we would still like to have a goal of being profitable.

A lot of commissions and being under a 30.

It would be a great way to do it and so we will still keep working on our expenses and trying to have the increase of expenses the slower than the increase in premiums.

Yeah.

<unk> on them more than happy to pay the expense if you get the get the good business, but that's helpful. Thanks a lot.

You bet. Thank you for the questions.

Our next question will come from Meyer Shields with K B W.

You May now go ahead.

Great. Thanks, good morning, everyone.

Good morning America.

Sorry, good morning.

I guess the question that I'm hearing a lot is.

If there are issues in umbrella.

Is there any concern that that is sort of the.

The initial reflection of another wave of social inflation that will ultimately impact.

Casualty lines, because it sounds like you're still confident in reserve adequacy or redundancy elsewhere I was wondering how youre thinking about that.

Yes.

It's a good question I think that it is a reflection of really all types of inflation.

I think that.

When you look at upper layers, there's a leveraged impact.

And then as you go up in layers for a constant inflation rate.

It has a higher impact on each layer as you go up and I think it's generally because those claims that otherwise would've been just below the attachment point now in flight into the layer as well as the normal inflation on the layer. So I think it's something that we keep it.

A close eye on trying to measure tried to price for go through everything that Steve mentioned already in terms of.

All hands on deck from underwriting to pricing to claims.

To make sure that we're understanding.

The impacts on umbrella and also recognizing that there is volatility there is as I mentioned, a little bit earlier in terms of what we've seen a variation of.

Of payments on commercial umbrella from one year to the next.

Theres just going to be some natural variation, but in this inflationary time period.

It calls for a very much a heightened sense of urgency and intensity from every area of our company.

Okay.

That is helpful.

Think mathematically similar question.

When we look at the large loss data for combined losses over.

Between one and $5 million and $5 million and higher in commercial is up 50% year over year.

Much more than in the second quarter is there any way of.

Getting a sense as to how much.

That increase in larger losses is just a function of in place and putting some losses over that line.

That's part of our analysis mayor and we'll be looking at that.

Where we're seeing it as Steve mentioned in terms of geographic areas in.

Sure.

The various limits that we write which are generally relative I think to most in the industry.

Mahler layers.

But all of that we need to take a look at it it is difficult to.

Ascertain or really specifically.

<unk> two inflation given the inherent volatility we see in the book.

Okay, and then one.

That is very helpful. I guess, one final question does anything in.

Third quarter results I guess on the cat side.

We didn't want to change the structure of your reinsurance protection in 2023.

Barry This is Steve spray I would say.

No nothing that we saw in the third quarter.

Would lend us to change the structure I think one of the good things with that is.

It's pretty common knowledge out there that you hear that.

Reinsurance market is going to harden.

We believe we're in a really good position relatively speaking.

That.

We're just in the middle of our property all of our.

Reinsurance renewals.

Now, but I think the good thing is as we have performed well for our reinsurers over time, we take a long term approach in partnership with them and we've got the financial strength and financial flexibility too.

If we need to take more co co participation in balance that right.

We're in an enviable position I think that we've got the financial strength to do that.

Okay. Thank you very much that's very helpful.

Okay.

Again, if you have a question. Please press Star then one.

Our next question will come from Chris Carter with Bank of America.

You May now go ahead.

Hi, everyone.

Good morning <unk>.

I have a quick question on rate versus trend in commercial lines I mean, obviously.

Loss cost trends thats kind of proceeded.

The challenging this quarter and you mentioned that your commercial pricing.

Higher versus <unk> 22, so how do you see the spread between your pricing versus loss cost trends and <unk> 22 versus earlier in the year and I mean is there any color that you all can give us on how that might evolve going forward, just given where inflation is trending and your.

Our continued pricing actions.

Okay.

Good question.

For the commercial lines segment, we are in a position as we define the loss cost versus.

<unk>.

Premium that we can stay ahead of the trend we are very prospective we're looking out into the prospective policy periods in terms of estimating how loss causes loss costs will rise versus the type of premium that we think we're going to get and we think for the sector.

We should be in a position to be ahead of loss costs. Obviously, some some of the lines of business are more challenging than others, but I think in.

Total that we can get there I think.

Really when you look at our X cat accident year combined ratio of 91, one Wow, that's a deterioration from where it was in 2021 that was an awfully.

Tough comp.

The best accident year.

Ex cat that we've ever put in for the full year. It was accident year ex cat combined ratio of 86 two.

The current 91, one that we have relative to our accident year ex cat for every year from.

2012 through 2019 is actually better than.

And then every one of those except for 2016, where we were at 98. So just.

Three basis points lower there so I think given where we are.

Given the trends that we're estimating recognizing the challenge that needs to be met with not only rate, but underwriting and again every aspect of every part of the company.

Coming together to do their part too.

Manage the loss costs lower.

We feel that we're in a good position for the sector as we go into 2023.

Thank you.

I had a quick question on the umbrella trends of well I think last quarter. You. All had mentioned that more gradual CT reopening had driven a little bit of volatility in those losses. I was curious just as that kind of period of closures gets further behind us if that continued.

Drive some issues this quarter.

<unk> gotten better.

I think it's still uncertain.

Hope that it.

Especially given our commentary on frequency and the umbrella line decreasing here into the third quarter that is slowing down but that is an uncertain.

Area that I think ourselves and really the industry in general will.

We will be keeping an eye on.

Thank you.

Thank you.

Yeah.

Our next question will come from Harry Fong with MTM Partners you May now go ahead.

Thank you good morning, Steve and Steve.

I heard.

Quite a bit about the umbrella line.

And the longer term trend.

<unk> on 2017 through 2021, however, we did see if I recall correctly.

In frequency in either the fourth quarter of 16 or first quarter of 17 that.

Led to a very similar discussion as what we've been hearing this morning.

You characterize what you saw in.

Large frequencies back then to what is going on today and.

Significant differences.

May require you to implement changes.

That will take.

Longer to improve the current situation.

Yes, Harry you're very astute in recognizing that I think.

We have seen with the volatility in the line over time.

Ups and downs in terms of the performance.

I would think one thing.

That was maybe a little bit different than now as we were seeing the paid to encourage encourage ratio rising.

Currently that that isn't the case I think we're reserving.

More now and we.

Were then relative to.

The exposure so it's a slight difference but to be honest I think it's the same approach.

That will take that we did back then.

That worked out to be successful really.

And what I would consider to be not that long of a time period.

So.

Sure Kurt.

Yes.

What drove you to increase the reserves just the macro environment rather than <unk>.

<unk>.

I would say, it's a little bit of both I would say, it's a little bit of both.

Sounds great. Thank you.

Thank you Harry.

This concludes our question and answer session.

I would like to turn the conference back over to Steve Johnston CEO for any closing remarks.

Thank you Anthony and thanks to all of you for joining US today, we look forward to speaking with you again on our fourth quarter call.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.