Cincinnati Financial Q2 2022 Earnings Call Transcript

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July 27, 2022

Key Takeaways

  • In Q2 2022, increased catastrophe losses and inflation pushed the property casualty combined ratio to 103.2%, contributing to a non-GAAP operating income of $104 million versus $292 million a year ago.
  • Net written premiums rose across all segments, with consolidated property-casualty up 7%, commercial lines up 10%, personal lines up 16%, and excess & surplus lines up 17%.
  • Investment portfolio valuations declined by approximately $1.8 billion before tax due to market movements, resulting in a net loss of $808 million, while ongoing investment income grew by 11%.
  • Specialty operations delivered strong profitability: excess & surplus combined ratio of 85.1%, Cincinnati Re premiums up 31% (combined ratio in low 80s), Cincinnati Global premiums up 47% (combined ratio below 70%), and life insurance operating income up 91%.
  • Cincinnati Financial maintained strong capital flexibility with affirmed A-ratings from Moody’s and S&P, repurchased 1.2 million shares at $124.44, and raised common dividends by 10% year-over-year.
AI Generated. May Contain Errors.
Earnings Conference Call
Cincinnati Financial Q2 2022
00:00 / 00:00

There are 9 speakers on the call.

Operator

Hello, and welcome to the Cincinnati Financial Second Quarter 2022 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Dennis McDaniel, Investor Relations Officer.

Operator

Please go ahead.

Speaker 1

Hello. This is Dennis McDaniel, Investor Relations Officer at Cincinnati Thank you for joining us for our Q2 2022 earnings conference call. Late yesterday, we issued a news release on our results along with our supplemental financial package, including our quarter end investment portfolio. To find copies of any of these documents, Please visit our investor website, cinfin.com/investors. The shortest route to the information is the quarterly results link in the navigation menu on the far left.

Speaker 1

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 may be made by others in the room with us, including President, Steve Spray Executive Vice President and Chief Finance, Teresa Hopper. First, please note that some of the matters to be discussed today are forward looking. These forward looking statements involve certain risks and uncertainties.

Speaker 1

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 And therefore is not reconciled to GAAP. Now I'll turn over the call to Steve.

Speaker 2

Thank you, Dennis. Good morning and thank you for joining us today to hear more about our Q2 results. Increased catastrophe losses And increasing inflation affecting the industry pressured our property casualty insurance results for this quarter. We are well positioned to improve results through continued focus on pricing and risk selection. As we have in the past, We'll follow our proven formula to successfully analyze and address challenged areas of our insurance operations.

Speaker 2

Our financial strength remains excellent and we are confident we can achieve profitable growth over the long term and through all economic cycles. We reported a net loss of $808,000,000 for the quarter due to the recognition of a reduction in the fair value of securities held in our equity portfolio. Non GAAP operating income of $104,000,000 for the Q2 of 2022 was down from last year's impressive $292,000,000 largely due to catastrophe losses that were $119,000,000 higher on an after tax basis. Our 103.2 percent 2nd quarter propertycasualty combined ratio was 17.7 Percentage points higher than the 85.5% posted Q2 of last year. That increase reflected higher catastrophe losses and less favorable results on both the prior accident year and current accident year basis.

Speaker 2

We regularly disclose large losses exceeding $1,000,000 for individual property casualty claims, Excluding losses from catastrophes, commercial property and commercial umbrella tend to account for the bulk of those losses, Each typically about 1 third of total large losses. We noted on our last call that commercial property large losses rose sharply in the Q1 of this year. That increase reversed in the Q2 when they declined 86% from the Q2 of 2021. For our personal lines segment, net written premiums grew 16%. However, in the Q2, commercial umbrella losses rose significantly, prompting reserve additions that we detailed in our 10 Q.

Speaker 2

That business has long history of profitability for us and has benefited from very strong pricing in recent years for both the industry and us. Overall, premiums continued a healthy growth pattern with steady average renewal price increases for each of our property casualty insurance segments. We benefited from outstanding production from the finest independent agents, while our underwriters remain steadfast In seeking to retain and grow profitable accounts and address areas where they judge pricing is not adequate. Segmenting opportunities on a policy by policy basis. Consolidated propertycasualtynetwrittenpremium Rose Cent for the Q2 of 2022.

Speaker 2

Our Commercial Lines Insurance segment continued to experience estimated average renewal price increases in the mid single digit percentage range similar to the Q1. Our excess and surplus lines insurance segment continued in the high single Personal lines average renewal price increases were slightly higher than in the 1st quarter remaining in the low single digit range. Personal auto is an area where we plan to more aggressively raise rates in future quarters as we work to improve its loss ratio. Underwriting processes designed to help premiums keep pace with rising property values Whether from outsized inflation or other changes in insured exposure amounts are another reason for significant increases in 2022 Renewal Written Premiums. Our Commercial Lines segment grew 2nd quarter renewal premiums by 10% And our Personal Lines segment also grew 2nd quarter renewal premiums by 10%.

Speaker 2

The Commercial Lines Segment grew 2nd quarter 2022 net written premiums by 10% with a combined ratio of 106.3 including higher than usual catastrophe losses and elevated inflation effects. For our personal lines segment, net written premiums grew 16%, mostly from our continued planned expansion of high net worth business produced by our agencies. Its 2nd quarter combined ratio of 112.1 percent also included higher than usual catastrophe losses and elevated inflation effects. The Q2 provided another example of the benefits of improving diversification over time by product line and geography. Profitability was very good for our operations in excess and surplus lines insurance, reinsurance, Global Specialty Insurance and Life Insurance.

Speaker 2

Our excess and surplus line segment had an 85.1% combined ratio And continued strong growth with Q2 2022 net written premiums growing 17%. Cincinnati Re and Cincinnati Global each continued a pattern of profitable growth. Cincinnati Re Grew net written premiums by 31% for the Q2 of 2022 with a combined ratio in the low 80% range. Cincinnati Global grew net written premiums by 47% with the combined ratio below 70%. Our life insurance subsidiary had another good quarter with net income of $21,000,000 and a 91% increase in operating income along with growth in term life insurance earned premiums of 8%.

Speaker 2

We continue to emphasize the importance over time of the value creation ratio, our primary measure of long term financial performance. VCR was negative 11.2% for the Q2 Valuations during the quarter. Next, Chief Financial Officer, Mike Sewell will discuss a few more important insights regarding our financial performance.

Speaker 3

Thank you, Steve, and thanks to all of you for joining us today. Investment income continues Grow and was up 11% for the Q2 of 2022 compared with the Q2 of last year. Dividend income rose 20% for the quarter, aided by $5,000,000 special dividend from one of our stock holdings. Net equity securities purchased during the first half of twenty twenty two totaled $40,000,000 Bond interest income grew 6% in the 2nd quarter. The pretax average yield of 4% for the fixed maturity portfolio was down 2 basis points from a year ago.

Speaker 3

The average pretax yield For the total of purchased taxable and tax exempt bonds during the Q2 of 2022 was 4.75%. We again purchased additional fixed maturity securities with net purchases totaling $240,000,000 during the 1st 6 months of the year. Valuation changes for our investment portfolio during the Q2 of 2022 We're unfavorable in aggregate for both our stock and bond holdings. The overall net decrease was approximately $1,800,000,000 Before tax effects, including a net decrease of $610,000,000 for unrealized gains in our bond portfolio. At the end of the quarter, total investment portfolio Net appreciated value was approximately $4,700,000,000 The equity portfolio was in a net gain position of $5,300,000,000 while the fixed maturity portfolio was in a net loss position of $564,000,000 Cash flow continues to fuel growth of investment income.

Speaker 3

Cash flow from operating activities for the 1st 6 months of 2022 generated $755,000,000 compared with $917,000,000 a year ago. As in the past, we emphasized careful management of And balance that with strategic investments in our business. The Q2 2022 property casualty Most of the decrease was from lower accruals for profit sharing commissions for agencies and related expenses. Moving on to loss reserves, we aim for a consistent approach by targeting net amounts in the upper half of the actuarially estimated range of net loss and loss expense reserves. As 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 in line of business.

Speaker 3

In the first half of twenty twenty two, our net addition to reserves was $414,000,000 A pace well ahead of 2021 or 2020 and a level we believe is an indication of the quality of our balance sheet. During the Q2 of 2022, We experienced $59,000,000 of property casualty net favorable development on prior accident years that benefited the combined ratio by 3.4 percentage points. On an all lines basis by accident year, net reserve development for the 1st 6 months of 20 that was partially offset by an unfavorable $15,000,000 in aggregate for accident years prior to 2020. Next, I'll comment briefly on capital management. We've had This is an approach that includes share repurchases as part of maintenance intended to offset shares issued through equity compensation plans.

Speaker 3

At the same time, changing circumstances or opportunities can influence us to repurchase more or less than historical averages. We continue to believe that we have plenty of financial flexibility and that our financial strength at the end of the quarter was excellent. Shareholder dividends continue to be our primary way of returning capital to shareholders and cash dividends Declared in the first half of twenty twenty two are up 10%. In addition, during the second quarter, We repurchased just over 1,200,000 shares at an average price per share of $124.44 As usual, I'll conclude with a summary of 2nd quarter contributions to book value per share. They represent the main drivers of our value creation ratio.

Speaker 3

Property casualty underwriting decreased book value by $0.26 Life insurance operations increased book value by $0.13 Investment income other than life insurance and net of non insurance items headed $0.53 Net investment gains and losses for the fixed income portfolio decreased book value per share by $3.03 Net investment gains and losses for the equity portfolio Decreased book value by $5.81 and we declared $0.69 per share in dividends to shareholders. The net effect was a book value decrease of $9.13 per share during the 2nd quarter to $66.30 per share. And now I'll turn the call back over to Steve.

Speaker 2

Thanks, Mike. While this wasn't the kind of quarter we want to have, 1 quarter doesn't sway us from our long term strategies and objectives. Our financial strength remains excellent and we are optimistic about the future. In the last month, 3 different third party organizations agreed. Moody's and S and P both affirmed our strong financial strength ratings.

Speaker 2

We were also again included on the Ward's 50 list. We are one of only 4 companies named 31 times to the Property Casualty Awards 50 recognizing our growth, profitability and shareholder return. Before we open the call for questions, I'd like to pause to recognize Marty Hollenbeck. Many of you know Marty from his years of investor travel. He's announced his intent to retire at the end of September after 35 years of service to our organization.

Speaker 2

We thank him for his steady hand overseeing investments, especially during some of the very challenging times of market volatility. As I'm sure you can all imagine, we're sad to see Marty go. At the same time, however, I have absolute confidence in Steve Solaria and his ability to smoothly step in to lead our investment operation with his nearly 30 years of experience. I know you all will feel the same as you get to know him during future investor visits. As a reminder, With Marty, Mike and me today are Steve Spray, Mark Schambeau and Teresa Hopper.

Speaker 2

MJ, please open the call for questions.

Operator

Thank you. We will now begin the question and answer session. Our lines are open. Our first question today comes from Derek Hahn of KBW. Please go ahead.

Speaker 4

Good morning. Thanks a lot. So my first question is 2 parts related to the commercial umbrella line of business. You readjusted to your loss picks last But just curious what kind of new information that you've gotten to make another adjustment this quarter? And then secondly, Since the umbrella line of business is pretty heavily exposed to inflation, how comfortable do you feel about The inflation assumptions embedded within your reserving and accident year loss picks.

Speaker 5

Hey, Derek. Steve Spray here. Thanks for the question. Yes, we've here in the Q2, we've definitely seen Inflationary impacts as well as pandemic effects on the umbrella book. As an example, courts closed During the pandemic, slower to open.

Speaker 5

We're seeing that show up. I would also say that Our umbrella book in general just from quarter to quarter is going to have inherent variability. And We've seen that here in the Q2. Maybe for note as well is that that book, our commercial umbrella book is Up over $500,000,000 now and we've got a long track record of underwriting profit, understanding how to price that book, The limits profile on it is relatively lower. The book reflects Our primary business, which tends to be smaller to midsize accounts, that's the business that we're Primarily writing the umbrella coverage is over.

Speaker 5

So there's uncertainty for sure. There's inherent variability. You're seeing that in the actual results. And then on top of that, as you can expect from Cincinnati And our long track record of recognizing uncertainty, we've gone ahead and recognized that through Yes, the IBNR for the reserving of the umbrella going forward too.

Speaker 4

Okay. That's really helpful. And then my second question is around the Personal Lines segment. You had really good growth in that segment, especially within the high net worth business. You've talked about in the past about How the high net worth business has a longer term attractiveness relative to the middle market business.

Speaker 4

So I'm just Curious how you think about the overall profitability in the near term, just in the context of rising loss trends?

Speaker 5

Yes. Derek, again, Steve Spray. Yes, we are feeling really good about the high net worth business, Primarily the team that we've assembled, the expertise, the experience that they have. And you're right, the majority of our growth in personal lines right now Is coming from high net worth. On the written premium side, it's almost all coming from high net worth.

Speaker 5

On new business, we have seen our middle market book Rebound, although again the new business lion share is still coming from the high net worth. High net worth is important to us. We think we have a valuable contract. We think the way we handle claims is worth more premium. But that being said, I wouldn't want anybody to think that we are not completely focused on that middle As well, we think that we are in a unique position that we have the sophisticated pricing, we have the products, We have the team.

Speaker 5

We have the historical experience long term on the middle market book As well. So we feel good about the middle market book. Maybe to get a little deeper for you there, Personal auto, obviously, is under pressure. A lot of that is coming from inflation. We are taking rate.

Speaker 5

We've been taking rate in 2022. We'll continue to take rate in that personal auto book in 2022. And we expect in 2023 that we're going to take a little bit a little more than double the rate in the personal auto book That we are this year. The homeowner book is performing better, but it's under a little bit of Pressure as well. We're taking rate in 2022.

Speaker 5

We plan to continue to take rate in 2023. And the other thing I would add there is In homeowner line, we are getting high single digit exposure change there too. So that's Helping with the inflationary pressure that we're feeling.

Speaker 4

Got it. I appreciate the color on that. And then last Just numbers question. Did you see any Russia or Ukraine related loss this quarter?

Speaker 2

This is Steve Johnston, and yes, we did. For the quarter, we and this would come from our Cincinnati RE and Cincinnati Global areas for the quarter, $6,000,000 and for the year to date $11,000,000 So we think we have that properly managed.

Speaker 4

Okay. Thank you very much.

Operator

Again, Our next question comes from Mark Dwelle of RBC. Please go ahead.

Speaker 6

Yes. Good morning, guys.

Speaker 7

I have a few questions.

Speaker 6

Starting with the commercial lines, when you get a you reported a 64.8% accident year loss ratio before cat losses, Your loss ratio before cat losses that was up 7 points. Is all of that 2nd quarter or is there a catch up within that to catch up for 1st quarter loss trend?

Speaker 2

Mark, this is Steve Johnston and that would be our 1st quarter pick. I'm sorry, 2nd quarter pick. That would be just the quarter's pick.

Speaker 6

So the relatively lower loss Pick that you had for the Q1, you've picked and I'm just trying to make sure I understand. Based on the run rate you're seeing right now, you would like your loss pick to be roughly 65 points as compared to Relatively lower pick that you had in

Speaker 2

the Q1. We just for each quarter, we try to do our best estimate Of our reserves of our losses and premiums for each of the quarter. So the 2 stand on their And of course, the year to date would be the sum of the 2.

Speaker 6

Okay, understood. And I presume the same applies related to The personal lines, the 8 point bump there that in accident year loss pick, that's all just There's no prior quarter development embedded within that number? That's correct. Okay. When you think about your loss cost trends right now, and I appreciate they vary by line of business.

Speaker 6

If you were thinking about the loss your average loss cost trend across the entire commercial lines book, for example, What would you say that that is right now based upon what you're seeing in your data?

Speaker 2

Well, you're right, Mark, that it is Done at a very detailed level. And when we look at our prospects, we do it prospectively. We try to estimate What we think we need to trend losses for into the prospective rating period for the policies that will be effective. We do think, and as Steve kind of alluded to that we are in a position that we can Keep up with and or exceed those loss cost trends as we go forward.

Speaker 6

I mean, can you share sort of a run rate number? I mean, some companies have said 5, some have said 6, 6.5. I mean, is there a number you can share in terms of what you're seeing as far as trend?

Speaker 2

We don't have a specific number like that in terms of a number, but when we do talk about getting Mid single digit rate, and as Steve alluded to for both personal and commercial some inflationary effects on our Exposure growth, we feel that we can keep pace with and exceed that trend.

Speaker 6

Okay. Turning over to the personal lines. I mean, again, You commented that you're getting kind of low single digit rates across the personal line book. Can you break that between what Portion what you're seeing in the auto book as compared to the homeowners book?

Speaker 2

Yes. This is Steve again. For the auto, it would be currently in the low single digit and for the homeowners in the mid single digit. And again, as Steve mentioned for the homeowners, there is exposure growth in the rate for inflation In addition to the rate that we quote,

Speaker 8

rate increase that we quote.

Speaker 6

As far as raising the rates on the auto book More aggressively, are you largely locked in on those rates now for this year based on your state filings? Where you have to kind of begin that process from the start in order to try to get more. I ask as I mean, your average rate increase in your auto book seems to be distinctly below where I would see at least some of your competitors at?

Speaker 2

It's a rolling process. So we're already engaged in some of the 2023 rate increases. And then also A point we make is through the pandemic, we did not reduce our rates any through there at all. We did have a Kind of a stay at home discount that was in place on the expense side for several weeks, But did not take rate decreases.

Speaker 6

But there's not much you can really do to improve the rate picture for 2022. It's So you're pretty much just beginning the process of trying to tackle on 23. Is that what I'm hearing?

Speaker 2

Well, it's ongoing. It's rolling. So they've already been filed. But to your point, and we both kind of understand the earnings diagram for 2022 In terms of how rate will be earned during 2022, The ones that are in process don't move the needle much.

Speaker 6

Right. Okay. One other question related to the investment portfolio. I guess I was a little surprised that The average pre tax yield was effectively unchanged in the quarter.

Speaker 1

I would have thought it

Speaker 6

for no other reason than just getting better Straits on the your shorter term money that that would have pushed a little bit higher. But can you talk about maybe some of the dynamics there? When we might see that move a little bit higher?

Speaker 8

Yes, Mark. This is Marty. Yes, I think you'll start to see it That's what you look there is actually a realized yield. Our book value ended the quarter 4 basis points Higher than did Q1, although still 5 basis points less than a year ago in the Q2. So we kind of had a little bit of In fact, in the Q1 of the run up in rates, it was sort of back loaded, so we didn't quite get the benefit with a little bit longer duration than typical.

Speaker 8

We didn't quite see it, but We saw definitely a significant rise in Q2. I think book yield purchased for the taxable was just under 5. Tax exempt was about 4. So it should start being more pronounced going forward here in the next couple of quarters.

Speaker 6

I see. Okay. So you are getting somewhere between 50 basis points and 100 basis points of Incremental, say, new money rate relative to kind of where the realized book rate is right now. Is that about right?

Speaker 8

Yes, about probably about 3 quarters 70 to 75 basis points.

Speaker 6

Okay. I'll stop there. Thank you.

Speaker 2

Thank you, Mark.

Operator

Our next question comes from Paul Newsome of Piper Sandler. Please go

Speaker 7

ahead. Thank you. Good morning. I wanted to hone in on a little bit on the large losses again. Is there any way to kind of think about that Increase from a sort of an inflationary perspective versus anything that would be non inflationary frequency level, Maybe just sort of something that's odd for the quarter as we look at sort of that impact and think about it on a perspective basis, both for the Personalized business as well as for the commercialized business, right?

Speaker 7

I think they were kind of both large losses in general both.

Speaker 5

Yes. Paul, Steve Spray again. I would say, again, that umbrella book, There's inherent variability in it. Statistically, the number of losses that are there is just It's a really low number from quarter to quarter. So even if it jumps, it's a smaller number.

Speaker 5

I would say other than inflationary factor, which is Certainly, inflationary factors certainly playing a role in that was what I mentioned earlier was just The courts reopening coming out of the pandemic, we've noticed that that has that's impacted the quarter. And I don't know if Steve wants to add anything to that or not.

Speaker 2

That's hard to improve upon. I guess if I would think of any Other comment would be umbrella is it attaches at a higher layer. And so there is a leveraged impact of inflation. So What I mean by that is if historically, a claim is just below the retention. Now with inflation heating up, it would inflate into the layer.

Speaker 2

And so you have a leveraged effect on The upper layer is like an umbrella policy, which would add to the claim count.

Speaker 5

Hey, Paul, again, Steve Spray. I might just add a couple of things there for you. It's not uncommon The auto losses both personal and commercial are what get up into that umbrella layer, those umbrella layers and we saw that In the Q2, so it's larger auto claims that have gotten up in there. We look at every single one of these claims as I mentioned in the Q1. And as far as geography or class of business, Industry segment, we're not there's randomness there and we're not seeing any patterns.

Speaker 5

So I thought I might add that for you too.

Speaker 7

That's great. Just to clarify, and I apologize, I can be very slow. The umbrella is this is a both commercial lines and personal lines or just commercial lines? And I guess your comments on the auto is that also Both commercial lines and personal lines. Are the auto creeping up into umbrella on both sides of the business or just the commercial side?

Speaker 5

Well, yes, so we write commercial umbrella over commercial business obviously and personal umbrellas over personal. In personal lines, It is always it's almost always predominantly auto claims that get into your umbrella policies there. On the commercial side, It varies between say general liability claims that can bounce up into the umbrella or commercial auto. I would say that we've seen just a slight uptick in the commercial auto getting into the umbrella.

Speaker 7

So the umbrella cases are on the commercial line and not so just the auto was elevated too Porsche Auto is elevated too, but that the commercial umbrella is not necessarily related to just the auto on the commercial side?

Speaker 5

That's correct.

Speaker 7

Okay. Thank you. Appreciate the help as always.

Operator

Seeing no more questions in the queue, this concludes our question and answer session. I would like to turn the conference back over to Steve Johnston for any closing remarks.

Speaker 2

Thank you, MJ, and thank you all for joining us today. We look forward to speaking with you again on our Q3 call.

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