Cincinnati Financial Q3 2021 Earnings Report

Cincinnati Financial EPS Results

• Actual EPS: $1.28
• Consensus EPS: $0.87
• Beat/Miss: Beat by +$0.41
• One Year Ago EPS: $0.39

Cincinnati Financial Revenue Results

• Actual Revenue: $1.79 billion
• Expected Revenue: $1.73 billion
• Beat/Miss: Beat by +$51.40 million
• YoY Revenue Growth: -19.80%

Cincinnati Financial Announcement Details

• Quarter: Q3 2021
• Date: 10/27/2021
• Time: After Market Closes
• Conference Call Date: Wednesday, October 27, 2021
• Conference Call Time: 8:00PM ET

Cincinnati Financial (NASDAQ:CINF) is an insurance holding company headquartered in Fairfield, Ohio. Founded in 1950 by four independent insurance agents, the company markets its products primarily through a network of independent agencies.

Its principal business is property and casualty insurance, including commercial coverage for businesses, workers’ compensation, commercial auto, homeowners insurance, personal auto insurance and other personal lines. The company also offers excess and surplus lines coverage for specialized or higher-risk exposures. Through its Cincinnati Life Insurance Company subsidiary, it provides life insurance, annuities and related financial products.

Cincinnati Financial serves individuals and businesses across much of the United States, with insurance operations concentrated in the property and casualty markets. The company also manages an investment portfolio associated with its insurance operations. Steven J. Johnston serves as president and chief executive officer.

Cincinnati Financial Q3 2021 Earnings Call Transcript

Key Takeaways

• Net income for Q3 2021 fell by $331 million year-over-year largely due to a $457 million after-tax reduction in fair value gains on the equity portfolio, but non-GAAP operating income tripled, rising $146 million.
• The Property Casualty combined ratio improved 11 percentage points to 92.6% in Q3, aided by 4.1 points of lower catastrophe losses and a 2.5 point improvement in accident-year results ex-catastrophe year-to-date.
• Net written premiums grew 10% in Q3, with Commercial Lines up 10%, Personal Lines up 7% and Excess & Surplus Lines up 30%, supported by renewal pricing ahead of projected loss-cost trends.
• Investment income increased 7% in Q3, dividend income rose 11%, and operating cash flow was up 36% year-to-date, while fixed-income purchases totaled $694 million, partly offset by modest net valuation losses.
• Reserve actions delivered $102 million of favorable development in Q3 (6.4 points of combined ratio relief), contributing to a 12.4% value creation ratio through September, within the annual target of 10–13%.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. To ask a question during the session, you will need to press star, then the number 1 on your telephone. If you require any further assistance, please press star 0. I would like to hand the call over to your speaker today, Mr. Dennis McDaniel, Investor Relations Officer. Sir, you may proceed.

[Dennis McDaniel, Investor Relations Officer at Cincinnati Financial]

Hello, this is Dennis McDaniel, Investor Relations Officer at Cincinnati Financial. Thank you for joining us for our Q3 of 2021 earnings conference call. Late yesterday, we issued a news release on our results along with our supplemental financial package, including our quarter-end investment portfolio. To find copies of any of these documents, please visit our investor website, cinfin.com/investors. The shortest route to the information is the quarterly results link in the navigation menu on the far left. On this call, you'll first hear from Chairman, President, and Chief Executive Officer, Steve Johnston, and then from Chief Financial Officer, Mike Sewell. After their prepared remarks, investors participating on the call may ask questions.

[Dennis McDaniel, Investor Relations Officer at Cincinnati Financial]

At that time, some responses may be made by others in the room with us, including Chief Investment Officer Marty Hollenbeck and Cincinnati Insurance's Chief Insurance Officer, Steve Spray, Chief Claims Officer, Marc Schambow, and Senior Vice President of Corporate Finance, Theresa Hoffer. 1st, 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.

[Dennis McDaniel, Investor Relations Officer at Cincinnati Financial]

Statutory accounting data is prepared in accordance with statutory accounting rules and therefore is not reconciled to GAAP. Now, I'll turn over the call to Steve.

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Thank you, Dennis. Good morning, and thank you for joining us today to hear more about our third quarter results. Overall, it was another good quarter. While weather-related catastrophes were lower than a year ago, communities across our country were impacted by hail, wind, flooding, and fire. As we send our field claims associates into these communities, they shine, providing excellent service in reassuring affected families and businesses. Net income for the Q3 of 2021 fell $331 million compared with the Q3 of last year due to $457 million less benefit on an after-tax basis in the fair value of securities held in our equity portfolio.

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Equity portfolio fair value changes have caused significant earnings volatility for several quarters recently, and net income increased $1.3 billion for the first 9 months of 2021 compared with a year ago, despite the Q3 decrease. non-GAAP operating income for the Q3 of 2021 more than tripled, up $146 million or 232% versus a year ago, with lower catastrophe losses on an after-tax basis, contributing $31 million of the increase. Our 92.6% third quarter 2021 property casualty combined ratio was 11 percentage points better than last year, with decreased catastrophe losses this year representing 4.1 points of the improvement.

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Our current accident year combined ratio, before catastrophe loss effects, also continued to improve and was 2.5 percentage points better than the first 9 months of 2020. Premium growth continued at a nice pace during the quarter as a strengthening economy and great relationships we enjoy with our agents helped us grow ahead of industry estimates. Consolidated property casualty net written premiums rose 10% in the third quarter of 2021. We continue to focus on risk segmentation, giving our underwriters the tools they need to retain and write more profitable accounts while walking away from opportunities when we determine pricing is inadequate.

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

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

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Our commercial lines insurance segment again experienced mid-single digit percentage range estimated average renewal price increases, down slightly from the Q2. Our Q3 personal line segment average renewal price increases slowed a little compared with the Q2, including personal auto in the low single digit range, while the excess and surplus lines insurance segment continued in the high single digit range. Our commercial line segment had an outstanding quarter with its 80.6% combined ratio improving by 21.8 percentage points compared with the Q3 a year ago and growing net written premiumsFor our personal line segment, Q3 net written premiums grew 7% as it continued to benefit from planned expansion of high net worth business produced by our agencies.

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Its Q3 of 2021 combined ratio was higher than a year ago, largely due to driving patterns moving towards pre-pandemic levels, increasing our personal auto loss ratio. Personal auto still produced a small underwriting profit for the Q3 and for the first nine months of 2021, our personal line segment in total had an underwriting profit. Our excess and surplus line segment produced a sub 95% combined ratio for the Q3 and the first 9 months of the year, and grew Q3 net written premiums by 30%. Cincinnati Re and Cincinnati Global each grew net written premiums in the Q3 of 2021. While both experienced significant losses from Hurricane Ida, leading to underwriting losses for the quarter, we weren't surprised by the level of loss we saw for an event of this magnitude based on our models.

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Our life insurance subsidiary produced Q3 of 2021 net income of $11 million and grew term life insurance earned premiums by 8%. I'll conclude with the value creation ratio, our primary measure of long-term financial performance. Strong operating results, measured as net income before investment gains, were the largest component of our VCR for both the third quarter and the first 9 months of the year. VCR through September 30, 2021 was 12.4%, already reaching our annual average target range of 10% to 13%. Now, our Chief Financial Officer, Mike Sewell, will add perspective on some other areas of our financial performance.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

Thank you, Steve. Thanks to all of you for joining us today. Investment income grew nicely during the Q3 of 2021, up 7% compared with the same period a year ago. Q3 dividend income was up 11%, and net purchases for the equity portfolio totaled $153 million for the first 9 months of the year. Interest income from our bond portfolio grew 7%, and the pre-tax average yield was 4.06%, up three basis points from the Q3 a year ago. The average pre-tax yield for the total of purchased taxable and tax-exempt bonds during the Q3 of 2021 was 3.43%.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

Investing in the fixed maturity portfolio continues to be a priority, with net purchases during the first 9 months of the year totaling $694 million. Valuation changes for our investment portfolio during the third quarter of 2021 were modestly unfavorable for both our stock and bond portfolios. The overall Q3 net loss was $158 million before tax effects, including $105 million for our equity holdings and $80 million for our bond holdings. At the end of the Q3, total investment portfolio net appreciated value was approximately $6.7 billion, including $5.8 billion for our equity securities. Cash flow was very strong in the Q3, as it has been all year.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

It contributes to investment income and was a major factor in the 7% increase in interest income we reported for the Q3. Cash flow from operating activities for the first 9 months of 2021 generated $1.5 billion, a 36% increase compared with the year-ago period. Expense management is another area we focus, always trying to optimize the balance of strategic business investments and expense controls. The Q3 of 2021 property casualty underwriting expense ratio was 0.9 percentage points higher than last year's Q3, including 1.2 points due to higher accruals for profit-sharing commissions for agencies. Moving on to loss reserves, our approach to reserving remains consistent and aims for net amounts in the upper half of the actuarially estimated range of net loss and loss expense reserves.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

As we do each quarter, we consider new information, such as paid losses and case reserves, and then updated estimated ultimate losses and loss expenses by accident year and line of business. During the third quarter of 2021, we experienced $102 million of property casualty net favorable development on prior accident years. It favorably contributed to the combined ratio by 6.4% for the quarter. On an all lines basis by accident year, net reserve development for the first 9 months of the year was favorable by $225 million for 2020, $46 million for 2019, $39 million for 2018, and $21 million in aggregate for all accident years prior to 2018.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

Regarding capital management, we also follow a consistent approach, including share repurchases as part of a maintenance intended to offset issuance of shares through equity compensation plans. We believe that our quarter-end financial strength was in good shape and provides plenty of financial flexibility. During the Q3, we repurchased approximately 100,000 shares at an average price per share of $119.03. I'll conclude my prepared remarks as I typically do, with a summary of third quarter contributions to the book value per share. They represent the main drivers of our value creation ratio.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

Property casualty underwriting increased book value by $0.59. Life insurance operations increased book value 5 cents. Investment income, other than life insurance and net of non-insurance items, added $0.81. Net investment gains and losses for the fixed income portfolio decreased book value per share by $0.39.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

Net investment gains and losses for the equity portfolio decreased book value by $0.51. We declared $0.63 per share in dividends to shareholders. The net effect was a book value decrease of $0.08 per share during the Q3 to $73.49 per share. Now I'll turn the call back over to Steve.

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Thank you, Mike. The COVID-19 pandemic has continued to demand flexibility in how we accomplish our day-to-day tasks. However, by staying focused on the steady execution of our long-term initiatives, we are able to keep producing these strong results. We have the people, the technology, and the drive to continue delivering strong value for shareholders for years to come. As a reminder, with Mike and me today are Steve Spray, Marc Schambow, Marty Hollenbeck, and Theresa Hoffer. Grace, please open the call for questions.

[Operator]

Absolutely. As a reminder to ask a question, you will need to press star, then the number one on your telephone keypad. Again, that will be star, then the number one on your telephone keypad. Your 1st question comes from the line of Paul Newsome from Piper Sandler. Your line is open.

[Paul Newsome, Managing Director and Senior Research Analyst at Piper Sandler]

Good morning. I'm curious as to whether or not you are seeing any of the same issues that some others have reported in personal lines with trying to get rate and getting pushback from the regulators because obviously there was this kind of effectively a windfall last year, but that's, you know, I think obviously temporary, but it doesn't really go into the math of how you file rates. You know, any thoughts on that, and are you seeing some of the same issues that some others are seeing?

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Well, I would say our relationships with our regulators are good. That, you know, as a general statement, we are doing fine and getting rate increases, or just changes to our rate structure approved. There are obviously some states that are tougher than others, but I think overall, again, with good relationships with the regulators, we're in a good position vis-à-vis getting adjustments to our rating plans approved.

[Paul Newsome, Managing Director and Senior Research Analyst at Piper Sandler]

Great. A broad question, I think, on inflation trends. Some of your peers have talked about the potential for a little bit higher inflation, particularly in the commercial lines side as we see maybe a resumption of cases coming through the courts and maybe perhaps a lag effect with some of the inflation that we've seen early on in home and in auto showing up in the commercial side of the house. Any thoughts on that? Do you think that's a reasonable assumption? Does it show up in any way in your own numbers?

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

We certainly see the prospect. You know, there's social inflation, there's the inflation of the costs and goods that we use to settle claims, but, you know, for cars, for houses, there's supply chain issues. You know, there could be lags in the court system and so forth. We build this all into our models and, you know, as we look at what we see to be loss cost trends, we try to be very prospective and look forward into what we think loss costs will be in the prospective policy period that we will be insuring and feel comfortable that we're getting rate that is ahead of those loss cost trends in each of our segments.

[Paul Newsome, Managing Director and Senior Research Analyst at Piper Sandler]

Great. Congrats on the quarter. Always,

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Thank you.

[Paul Newsome, Managing Director and Senior Research Analyst at Piper Sandler]

appreciate your insights.

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Thank you, Paul.

[Operator]

Thank you. Next up, we have Mike Zaremski from Wolfe Research. Your line is open, sir.

[Charlie Lederer, Equity Research Analyst at Wolfe Research]

Hey, guys. This is actually Charlie Lederer on for Mike. Good morning.

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Morning, Charlie.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

For my 1st question, can you talk about the sustainability of the strong underlying margins? Were there any, like, notable, like, current year reserve development that benefited it?

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

We feel good, Charlie, about the sustainability of our results as we, you know, look forward with estimates of loss cost trends and pricing and you know, feel comfortable in making our best estimates of our reserves and you know, we're very optimistic for the future performance of the underwriting of the company.

[Charlie Lederer, Analyst at Wolfe Research]

Okay, thanks. I know you mentioned the reserve releases by accident year. Could you give any color around the releases, particularly from the recent accident years? Yeah, yeah. Charlie, this is Mike Sewell. You know, related to, you know, as I mentioned for the quarterly, it was 6.4 points. There was, you know, certain areas that were more on the current, more recent accident years, which is probably no surprise when you think about the short tail lines, which would be commercial property, commercial auto, all of the personal lines. Mainly those developments were favorable in accident year 2020.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

You know, even with that, you know, I'd be cautious. There's a lot of uncertainty, you know, with the pandemic and other things going on around there. If I look at workers' compensation, you know, that's one of our longest tails that we have. That one has favorable development that I would say goes over several accident years back a few years. You're seeing favorable development there. The claims frequency seems to have declined a little bit, but we've put a lot of cost control measures in over the years that has really been benefiting the workers' comp line of business. Then lastly, commercial casualty.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

You know, really there, looking at the paid loss, case reserve data over time are important factors for how that, how those develop. Those have been favorable in some of the more recent accident years, the last couple, not just the last one. You know, as we look at in total for the property casualty business, you look at paid losses as a percent to incurred. It was up slightly for year to date, 2021 versus last year. It is below the 2017 through 2019 averages. You'll see that in our supplement.

[Charlie Lederer, Equity Research Analyst at Wolfe Research]

All right. Thanks, guys.

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Thanks, Charlie.

[Operator]

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

[Mark Dwelle, Director, Insurance Equity Research at RBC Capital Markets]

Yeah, good morning. Just a couple of

[Mike Sewell, EVP and CFO at Cincinnati Financial]

Good morning, Mark.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

Couple of questions. 1st on the E&S unit, there was. It wasn't very much in dollar terms, but there was a reserve addition there. I was wondering if you could talk about that in a little more detail 'cause those are sort of rare.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

I just think as we look at the environment, Mark, we see a little bit maybe of a I don't know if you'd call it, but a slowdown in the settlement rate there as we have, you know, claims that are taking a little bit longer to settle. In terms of coming up with our best estimate there, we want to recognize that, and that's what you're seeing.

[Mark Dwelle, Director, Insurance Equity Research at RBC Capital Markets]

Okay. The second question I wanted to ask, I mean, you had a pretty strong growth in new business, certainly over last year, but it was a pretty good quarter for new business. Anything that you're seeing in terms of, you know, the type of customers that you're winning or geographic spread of where you're winning? Just a little bit of color on where the new stuff is coming from.

[Steve Spray, Chief Insurance Officer at Cincinnati Insurance]

Yeah, Mark, this is Steve Spray. You know, we're seeing it across our entire footprint, and I think it, as you mentioned, you know, there's a little bit of an easier comp from the pandemic year last year. I just think it is execution of our agency-focused strategy, doing business locally, face-to-face with our agents, building deep relationships, underwriting and pricing every single account policy by policy. We're out there, we're aggressively trying to help our agents write business, solve problems. Our field reps, our field underwriters, we use that interchangeably, have the same pricing tools that our renewal underwriters have here. So we feel good about the pricing of the new business that we're writing.

[Steve Spray, Chief Insurance Officer at Cincinnati Insurance]

It just, I think it's just continued solid execution, quite frankly, across all of our segments on the new business front, and it goes to those deep relationships we have with our agents.

[Mark Dwelle, Director, Insurance Equity Research at RBC Capital Markets]

Thanks for the color on that. Then 1 other question, also kind of relating, you know, mainly to renewals and, you know, the extent that you're getting, you know, premium audits that are flattering results a little bit. Can you just talk about a kind of exposure unit growth and to what degree that impacted the overall premium growth in the quarter?

[Steve Spray, Chief Insurance Officer at Cincinnati Insurance]

Sure. For commercial lines all in, I would say that for the premium increase it's about half rate and about half exposure.

[Operator]

Thank you. Once again, in order to ask a question, please press star then the number one on your telephone keypad. Again, that will be star then the number one on your telephone keypad. Your next question comes from the line of James Bach from KBW. Your line is open.

[James Bach, Analyst at KBW]

Thank you. You mentioned that the percent of paid losses to incurred was up, and I just wanted to see if you could give a little more detail on the negative 35 in IBNR that was reported for commercial lines on the quarter. Just kind of, you know, some more detail on that.

[Mike Sewell, EVP and CFO at Cincinnati Financial]

Well, I think our actuaries, they look at a variety of methodologies. They use several methods. They look at a lot of different data points in addition to paid losses. They'll look at case reserves, incurred losses, try to get an estimate for, you know, what we're seeing in terms of inflationary factors and set the best estimate that we can every quarter. I think, you know, it's been a good track record now with 31 or 32 years in a row now where we've had favorable development. We're very confident. It's an experienced team that hasn't changed over the years and feel comfortable with the estimates that they're making.

[James Bach, Analyst at KBW]

All right. Great.

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Thank you, James.

[Operator]

Thank you. There are no further questions at this time. I will turn the call back over to our CEO, Mr. Steve Johnston, for any closing remarks. Sir?

[Steve Johnston, Chairman, President, and CEO at Cincinnati Financial]

Thank you. Thank you, Grace. Excellent job with the call. Thanks to all of you for joining us today. We look forward to speaking with you again on our Q4 call. Have a great day.

[Operator]

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

Participants

Executives

• Dennis McDaniel, Investor Relations Officer
• Steve Johnston, Chairman, President, and CEO
• Mike Sewell, EVP and CFO

Analysts

• Paul Newsome, Managing Director and Senior Research Analyst at Piper Sandler
• Charlie Lederer, Equity Research Analyst at Wolfe Research
• Charlie Lederer, Analyst at Wolfe Research
• Mark Dwelle, Director, Insurance Equity Research at RBC Capital Markets
• Steve Spray, Chief Insurance Officer at Cincinnati Insurance
• James Bach, Analyst at KBW