Cincinnati Financial Q2 2021 Earnings Call Transcript

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July 28, 2021

Key Takeaways

  • Cincinnati reported an 85.5% combined ratio in Q2, a 17.6-point improvement from last year, driven by lower catastrophe losses and disciplined underwriting.
  • Consolidated P&C net written premiums rose 10% in Q2, with commercial lines up 8%, personal lines up 4%, excess & surplus lines up 26%, and Cincinnati Re up 62%.
  • The investment portfolio delivered a net gain of $652 million in Q2 and 5% growth in investment income, lifting book value per share to a record $73.57.
  • Net income for Q2 fell by $206 million year-over-year due to $439 million less after-tax benefit from equity portfolio fair value changes, underscoring earnings volatility.
  • Cincinnati experienced $119 million of favorable prior-year reserve development in Q2, improving the combined ratio by 7.8 points and maintaining reserves in the upper half of actuarial ranges.
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Earnings Conference Call
Cincinnati Financial Q2 2021
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good day and thank you for standing by and welcome to the Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Dennis McDaniel, Investor Relations Officer, please go ahead.

Speaker 1

Hello. This is

Speaker 2

Thank you for joining us for our Q2 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, simfin.com/investors. President and Chief Executive Officer, Steve Johnston and then from Chief Financial Officer, Mike Sewell. After their prepared remarks, Cincinnati Insurance's Chief Insurance Officer, Steve Spray Chief Claims Officer, Mark Shambaugh Senior Vice President of Corporate Finance, Theresa Hopper.

Speaker 2

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

Speaker 3

the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and therefore is not reconciled to GAAP. Now, I'll turn over the call to Steve. Thank you, Dennis, and good morning and thank all of you for joining us today to hear more about our 2nd quarter results. We had another quarter of strong operating performance as we remain focused on steady progress towards profitably growing our insurance business over time.

Speaker 3

Financial results benefited from several areas, including excellent investment management and ongoing efforts to continually improve insurance operations. Net income for the Q2 of 2021 decreased by $206,000,000 compared with the Q2 of last year, primarily due to $439,000,000 less benefit On an after tax basis, in the fair value of securities held in our equity portfolio. Equity portfolio fair value changes caused significant earnings volatility for several quarters since early 2020 And net income for the 1st 6 months of 2021 increased by $1,600,000,000 from a year ago. Non GAAP operating income was up $221,000,000 or 3 11 percent for the quarter With lower catastrophe losses on an after tax basis contributing $136,000,000 of the increase. Our 85.5 percent propertycasualty combined ratio was 17.6 percentage points better than a year ago with decreased catastrophe losses in the 2nd quarter representing 12.6 points of the improvement.

Speaker 3

The current accident year combined ratio before catastrophe loss effects also continued to improve and was 2.0 percentage points better than last year for the 2nd quarter and 3.5 points better on a 6 month basis. Our underwriters emphasize segmentation of risks, working to retain more profitable accounts and obtaining better Pricing on business that we identify as less profitable. At the same time, we are diversifying risks by product line and geography, While excellent service from our claims operation also helps grow our business. Premiums Grew at an impressive rate for the Q2 in a row, reflecting expertise and focus by our associates and great production by the premier independent agents who represent Cincinnati Insurance. Consolidated property casualty net written premiums rose 10% in the Q2 of 2021.

Speaker 3

We continue to believe we are growing profitably by combining data and judgment as we underwrite and price business. We also recognize the importance of remaining disciplined and walking away from opportunities when we determine pricing is inadequate. Renewal pricing during the Q2 continued to be ahead of our estimate for prospective loss cost trends for each property casualty segment. Our Commercial and Personal Lines Insurance segments again experienced mid single digit percentage range estimated average price increases, While the Excess and Surplus Lines Insurance segment continued in the high single digit range. Each insurance segment grew its business and produced Our Commercial Lines segment had superb results With its 84.2 percent combined ratio improving by 14.9 percentage points compared with the 2nd quarter a year ago and growing net written premiums by 8%.

Speaker 3

For our personal line segment, 2nd quarter net written premiums grew 4%, Continuing to benefit from planned expansion of high net worth business produced by our agencies. Its combined ratio of 92.7 Our excess and surplus line segment produced a combined ratio below 90%, while also growing net written premiums by an impressive 26% and posting favorable reserve development on prior accident years for the 3rd time in the past 4 quarters. Cincinnati REIT continued its strong diversified and profitable growth as net written premiums grew 62% in the 2nd quarter among hundreds that they are routinely submitted in a quarter. Cincinnati Global again produced a fine underwriting profit with an Exceptional loss and loss expense ratio as favorable reserve development on prior accident year catastrophes offset most of its other losses. Its net written premiums decreased a little as underwriters have been reducing catastrophe loss risk while growing some newer lines of business.

Speaker 3

Our life insurance subsidiary had another good quarter, reporting 2nd quarter net income up 17% from a year ago and Growing life insurance earned premiums by 2%. I'll conclude with the value creation ratio, our primary measure of long term Financial performance. Strong operating results and favorable securities markets produced an excellent VCR at 7.3% for the 2nd quarter and 11.6% for the first half of the year. The contribution from operations Measured as net income before investment gains was 4.8% for the 1st 6 months of 2021, up 2.7 percentage points from a year ago. Now, our Chief Financial Officer, Mike Sewell, will comment on a few other important areas of our financial performance.

Speaker 4

Thank you, Steve, and thanks for all of you joining us today. Our investment portfolio continued to perform very well during the Q2 of 2021, including investment income growth of 5%. Dividend income was up 13% for the 2nd quarter Interest income from our bond portfolio grew 3% and the pretax average yield was 4.02%, Down 9 basis points from the 2nd quarter a year ago, the yield on a 6 month basis matched last year's first half. The average pre tax yield for the total of purchased taxable and tax exempt bonds during the Q2 2021 was 3.33%. Investing in the fixed maturity portfolio continues to be a priority With net purchases during the 1st 6 months of the year totaling $465,000,000 Investment portfolio valuation changes for the Q2 2021 were favorable for both our stock portfolio and our bond portfolio.

Speaker 4

The overall net gain was $652,000,000 before tax effects, including $489,000,000 for our equity portfolio and $141,000,000 for our bond portfolio. At the end of the second quarter, total investment Portfolio net appreciated value was approximately $6,900,000,000 including $5,900,000,000 and our equity portfolio. We had another quarter of strong cash flow, again contributing to investment income. Cash flow from operating activities for the 1st 6 months of 2021 generated $917,000,000 up 40 from a year ago. Expense management is always an important matter as we work to achieve a good balance between The Q2 of 2021 property casualty underwriting expense ratio for personal auto policies and higher credit losses due to uncollectible premiums.

Speaker 4

The 2nd quarter ratio was higher than the Q1 of this year, largely due to higher accruals related to profit sharing in the 2nd quarter and lower expenses in the 1st quarter that benefited from less business travel. Next, I'll highlight a few items regarding loss reserves and reinsurance. 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. During the Q2 of 2021, we experienced $119,000,000 of property casualty net favorable development on prior accident years. The combined ratio effect was 7.8% for the quarter.

Speaker 4

As we do each quarter, we consider new information such as Based on our study of new data during the year, we update estimates as needed. Together, our workers' compensation and commercial casualty lines of business represent about half of our $7,000,000,000 quarter end Total gross property casualty loss and loss expense reserves, and they had the largest amounts of 2nd quarter favorable net reserve development. Workers' compensation has the longest tail As claims can remain open for many years, while the amount of reserve release for any given accident year was relatively small, The aggregate amount was $27,000,000 Commercial casualty paid loss development by accident year over time This is an important factor in estimating ultimate losses. Calendar year basis data is not as useful. For example, while the Q2 2021 paid loss total for commercial casualty was higher than a year ago, For the 1st 6 months of 2021, it was 15% less than what we saw prior to the pandemic In the first half of twenty nineteen, despite earned premiums that were 13% higher in 2021, Net favorable reserve development during the second quarter was concentrated in the 4 most recent accident years, including a little more than 2 thirds for accident years 2017 through 2019.

Speaker 4

On an all lines basis by accident year, net reserve development for the first half of the year was favorable by $170,000,000 For 2020, dollars 26,000,000 for 20 19, dollars 15,000,000 for 20 18 and $18,000,000 in aggregate for accident years prior to 2018. Nearly 80% Of the 2020 amount was for property or auto lines of business, which have a much shorter tail and workers' compensation or commercial casualty. Regarding reinsurance, we disclosed in our 10 Q that we non renewed Our combined property catastrophe occurrence excess of loss treaty that provided up to $50,000,000 of coverage for business written on a direct basis and by Cincinnati Re. And We restructured the reinsurance program in place for Cincinnati REIT only that provides property catastrophe excess of loss coverage Now with a total available aggregate limit of $48,000,000 Another reinsurance detail we disclosed pertain to cyber insurance that we offer as an affirmative coverage option on various policies. Some recent industry reports indicate that on a direct written basis premium basis, Sensei Insurance is among the 20 largest Cyber insurers in the U.

Speaker 4

S. Premiums for those policies are ceded to a reinsurer, therefore transferring substantially all of that risk. I'll briefly comment on capital management. Our approach remains consistent and we ended the quarter with outstanding financial strength and financial flexibility. In typical fashion, I'll wrap up my prepared First of our value creation ratio.

Speaker 4

Property casualty underwriting increased book value by $1.08 Life insurance operations increased book value 0 point 0 $7 Investment income other than life insurance and net of non insurance items added $0.80 Net investment gains and losses for the fixed income portfolio Increased book value per share by $0.69 Net investment gains and losses for the equity portfolio increased book value by $2.40 and we declared $0.63 per share in dividends to shareholders. The net effect was a book value increase of $4.41 per share during the Q2 to a record high $73.57

Speaker 3

per share. And now, I'll turn the call back over to Steve. Thanks, Mike. It's satisfying to see the steady execution of our initiatives producing these strong results. In June July brought a return of business travel and a return of our headquarters associates working together in person.

Speaker 3

It's wonderful to see so many familiar faces in the hallway and to be able to get out from behind our desks to visit with agents and our field teams across the country. This return to a bit of normalcy has produced an energy that you can feel across our organization, bringing with it lots of optimism for the future of Cincinnati Financial. As a reminder, with Mike and me today are Steve Spray, Mark Schambeau, Marty Hollenbeck and Theresa Hoffer. Polly, please open the call for questions.

Operator

Please standby while we compile the Q and A roster. Your first question comes from the line of Derek Hahn with KBW.

Speaker 1

Good morning. Thanks for taking my question. Good morning. I just had a question on the commercial growth. You've obviously had impressive commercial Growth in the Q2 of 7.6 percent, but just given the rapid economic normalization that you've talked about, I would have maybe expected the premium growth to be a little higher.

Speaker 1

Was that just a function of prudent cycle management that You've had in the past maybe non renewing some of the unprofitable businesses?

Speaker 5

Hi, Derek. This is Steve Spray. Yes, I think it's a great question. Our new business for commercial lines has Continued to improve throughout the first half of this year getting back post, I guess, pre COVID. And it's always a balance between the growth and the profitability.

Speaker 5

And the way our New business underwriters in the field and our headquarters underwriters here are executing on pricing sophistication, pricing Segmentation and just balancing that with new business growth. We're pretty pleased with Where we are now and candidly feel like we've got good runway ahead of us to continue as we get back to calling on our agents face to face, taking advantage of those opportunities.

Speaker 1

Got you. That's helpful. And just on a related note, you previously guided for 6% or higher top line growth for this year. Your first half is obviously well above the 6% mark. And the 2nd quarter growth of 9.9% wasn't really driven by easier comps.

Speaker 1

So how should we think about the growth in the second half including in commercial?

Speaker 3

Thanks, Derek. This is Steve Johnston. And we feel good about the growth in total and it's coming Really from all of our segments, I would point out that Cincinnati Re represented 5 percentage points of The 11% growth for the first half, and I think We hope that market conditions continue to be just as they are with the reinsurance market, but there's always a chance That can change, I guess there's just uncertainty. The economy could weaken. So there are things that could Impact the growth, but we really do feel good about our growth, good about our growth prospects, Really confident in the business that Cincinnati Re is bringing to us with their growth and really across every one of our operational areas.

Speaker 1

Got it. Thanks. And if I can squeeze just one more question in. Within workers' comp, You had material favorable reserve development, but the core loss ratio kind of ticked up higher sequentially. Is there a driver behind that?

Speaker 3

I think with the workers' comp, Just there's been rate pressure throughout the industry. There's been a lot of talk of it kind of Maybe bottoming out and so forth that has had an impact, but I think our team has just done a great job With the workers' compensation in terms of pricing, underwriting, segmenting the business, and so we feel good about our prospects in workers'

Operator

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

Speaker 6

Yes, good morning. A couple of questions.

Speaker 1

Good morning.

Speaker 6

Maybe looking first at Personal Lines, I guess it was a very good result in the quarter. I guess I was a little bit surprised

Speaker 4

that the accident year margin actually was a

Speaker 6

little bit better in Year margin actually was a little bit better in the Q2 than in the Q1. It did obviously deteriorate against Year ago, but not nearly by as much as we've seen with a lot of other personal lines writers. Given all of the Increased business activity, back to work, more normal driving behaviors. I was just curious to see what you were seeing in the data that might kind of align with that?

Speaker 5

Mark, Steve Spray again and maybe Steve, Johnston and I can tag team on this one. Over the last couple of years, We've really had to take some specific or some underwriting and pricing action in specific states. And I think that is showing up in the results. And at the same time, we've continued to build out our pricing sophistication tools, Segmentation and personalizing, you can see that showing up in improving our new business results as well. I think that hopefully that gets to the question as far as just the improved results.

Speaker 5

It's On multiple fronts and specifically taking some more aggressive action in some specific states that have needed it. And you can also see that that's putting some pressure just on the net written premium growth as well.

Speaker 6

Within your personal lines, what percentage of the business is sort of auto related as compared to homeowners related?

Speaker 3

Yes, we have that here for the quarter. The personal lines written Premium was 166 I'm sorry, the personal auto written premium was 166,000,000 homeowners 211 And then the other personal, which would be everything that goes with the inland marine and so forth of 62,000,000

Speaker 6

I guess that's probably a factor as well. You've got a richer homeowners mix than many peers do. Okay. Thanks for that. The second question that I had really related to the commercial lines.

Speaker 6

You partly addressed it earlier, but in thinking about the overall growth rate in the quarter for premiums, How would you if you had to just generally segment between growth that was driven by exposure unit growth at your customers, Just expanded unit counts or underlying policy size versus just pure price. Is there an easy way to kind of divide that up?

Speaker 5

Yes, I think I would say it's a little bit of all of it, Mark. This is Steve Spray again. Price is certainly making an impact there, retention and then we are seeing exposures And our commercial lines book returned to almost they're getting close to pre COVID exposure basis. And it really depends on, I think probably for any carrier, especially for us, just your mix as well. And different segments, Different industry segments are impacted differently from COVID.

Speaker 5

Just as an example, construction and manufacturing, Real estate all held up pretty well throughout COVID and in the first half of twenty twenty one. And so We have a fair amount of that business on our books and some other industry segments maybe didn't fare as well and would impact us less So there's a lot of moving parts there.

Speaker 6

Okay. I appreciate that. And then two other questions. One, could you just provide a kind of a general update on some of the business interruption litigation that I mean, this was the only thing we could talk about this time a year ago. Obviously, a certain amount of time has passed and just kind of an update on what you continue to see and what proportion of the reserves that are set up a year ago It might still remain in IBNR.

Speaker 3

Sure. I'll take that one, Mark. And I think it's fair to say that our BI litigation used to progress pretty well. During the quarter, we received the 1st appellate court decision that considered our policy language and it confirmed that there was no coverage. And the overwhelming majority of trial courts from across the country continue to apply the policy language as we had anticipated.

Speaker 3

We've said before that we believe our policy language that requires direct physical loss or damage to property to trigger coverage is clear And that the virus does not cause direct physical loss or damage to property. So we think that the BI litigation continues to Progressed pretty well. In terms of the amounts, they have been relatively consistent with really no material changes during the quarter.

Speaker 6

Okay. Thank you for that. And then just one last question. Within and this is just kind of getting used to these new business units within Cincinnati Re and Cincinnati Global, are either of those businesses likely to have exposure to Some of the flooding that has been occurring in Europe recently?

Speaker 3

We've been keeping a close eye on that and we don't think that there's Material exposure there.

Speaker 6

Appreciate that. It's still early.

Speaker 3

From everything we can tell to this point, no material damage there.

Speaker 6

Okay. Thanks for that. Those are all my questions.

Speaker 3

Thank you, Mark. Excellent questions.

Operator

Thank you. And at this time, there are no further audio questions. We'll now turn the call back over to Mr. Steve Johnston for closing remarks.

Speaker 3

Thank you, Polly, and thanks for all of you for joining us today. We look forward to speaking with you again on our Q3 call. Have a great day.

Operator

And thank you. This concludes today's conference call. You may now disconnect.

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