Cincinnati Financial Q3 2021 Earnings Call Transcript

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October 27, 2021

There are 9 speakers on the call.

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 speakers' remarks, there will be a question and answer session. I would now like to hand the call over to your speaker today, Mr.

Operator

Dennis McDaniel, Investor Relations. Sir, you may proceed.

Speaker 1

Hello. This is Dennis McDaniel, Investor Relations Officer at Cincinnati Financial. Thank you for joining us for our Q3 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.

Speaker 1

The shortest route to the information is the quarterly results link 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. 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, Mark Shambo and Senior Vice President of Corporate Finance, Teresa 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.

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 accounting rules 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 Q3 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.

Speaker 2

Net income for the Q3 of 2021 fell $331,000,000 compared with the Q3 of last year, Due to $457,000,000 less benefit on an after tax basis in the fair value of securities held in our equity portfolio. Equity portfolio fair value changes have caused significant earnings volatility for several quarters recently And net income increased $1,300,000,000 for the 1st 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 $146,000,000 or 2 32 percent versus a year ago, with lower catastrophe losses On an after tax basis, contributing $31,000,000 of the increase. Our 92.6 percent Q3 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. Our current accident year combined ratio Before catastrophe loss effects also continued to improve and was 2.5 percentage points better than the 1st 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 Help desk grow ahead of industry estimates.

Speaker 2

Consolidated property casualty net written premiums rose 10% in the 3rd 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. Renewal pricing during the 3rd quarter Continue to be ahead of our estimate for prospective loss cost trends for each Property Casualty segment. Our Commercial Lines Insurance segment again experienced mid single digit percentage range estimated average renewal price increases, Down slightly from the Q2. Our 3rd quarter Personal Lines segment average renewal price increases slowed a little compared with the 2nd quarter, including Personal Auto in the low single digit range, while the Excess and Surplus Lines Insurance segment continued in the high single digit range.

Speaker 2

Our Commercial Lines 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 premiums by 10%. For our Personal Lines segment, 3rd quarter net written premiums grew 7% as it continued to benefit from planned expansion of high net worth business produced by our agencies. Its Q3 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 3rd quarter And for the 1st 9 months of 2021, our Personal Lines segment in total had an underwriting profit. Our excess and surplus line segment produced a sub-ninety 5 percent combined ratio for the Q3 and the 1st 9 months of the year and Grew 3rd quarter net written premiums by 30%.

Speaker 2

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. Our life insurance subsidiary produced Q3 2021 net income of $11,000,000 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 3rd quarter and the 1st 9 months of the year.

Speaker 2

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, We'll add perspective on some other areas of our financial performance.

Speaker 3

Thank you, Steve, and 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. 3rd quarter dividend income was up 11% and net purchases for the equity portfolio totaled $153,000,000 For the 1st 9 months of the year, interest income from our bond portfolio grew 7% And the pre tax average yield was 4.06%, up 3 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 percent. Investing in the fixed maturity portfolio continues to be a priority With net purchases during the 1st 9 months of the year totaling $694,000,000 Valuation changes for our investment portfolio during the Q3 of 2021 were modestly unfavorable for both our stock and bond portfolios.

Speaker 3

The overall 3rd quarter net loss was $158,000,000 Before tax effects, including $105,000,000 for our equity holdings and $80,000,000 for our bond holdings. At the end of the Q3, total investment portfolio net appreciated value Was approximately $6,700,000,000 including $5,800,000,000 for our equity securities. Cash flow was very strong in the Q3 as it has been all year. It contributes to investment income and was a major factor in the 7% increase in interest income we reported for the 3rd quarter. Cash flow from operating activities for the 1st 9 months of 2021 generated $1,500,000,000 A 36% increase compared with a year ago period.

Speaker 3

Expense management There's another area we focus, always trying to optimize the balance of strategic business investments And expense controls. The Q3 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. 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.

Speaker 3

During the Q3 of 2021, we experienced $102,000,000 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 1st 9 months of the year was favorable by $225,000,000 For 2020, dollars 46,000,000 for 20 19, dollars 39,000,000 for 20 18 and $21,000,000 in aggregate for all accident years prior to 2018. 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 Q3 contributions to the book value per share, they represent the main drivers of our value creation ratio.

Speaker 3

Property casualty underwriting increased book value by $0.59 Life insurance operations increased book value 0 point 0 $5 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 Net investment gains and losses for the equity portfolio decreased book value by $0.51 And 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. And now, I'll turn the call back over to Steve.

Speaker 2

Thank you, Mike. The COVID-nineteen 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, Mark Chambault, Marty Hollenbeck and Teresa Hopper.

Speaker 2

Grace, please open the call for questions. Absolutely.

Operator

Your first question comes from the line of Paul Newsome from Piper Sandler. Your line is open.

Speaker 4

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, we're trying to get rate and getting pushed back from the regulators because Obviously, there was kind of effectively a windfall last year, but that's I think obviously temporary, but it doesn't really go into the math of How you file rate? Any thoughts on that? And are you seeing some of the same issues that some others are seeing?

Speaker 2

Well, I would say our relationships with our regulators are good that as a general statement that 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 visavis getting adjustments to our rating plans approved.

Speaker 4

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 And auto showing up in the commercialized side

Speaker 2

of the house.

Speaker 4

Any thoughts on that? Do you think that's a reasonable assumption? And does it show up in any way in your own numbers?

Speaker 2

We certainly see the prospect. There's social To inflation, there's the inflation of the costs and goods that we use to settle claim for cars, for houses, there's supply chain issues. There could be lags in the court system and so forth. We build this all into our models. And As we look at what we see to be loss cost trends, we try to be very perspective and look forward into what we I think loss costs will be in the prospective policy period that we will be ensuring and feel comfortable that we're getting rate that Is ahead of those loss cost trends in each of our segments.

Speaker 4

Great. Congrats on the quarter. Always on. Appreciate your insights.

Speaker 2

Thank you, Paul.

Operator

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

Speaker 5

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

Speaker 2

Good morning, Charlie.

Speaker 5

So for my first Question, can you talk about the sustainability of the strong underlying margins? Were there any notable like current year reserve development that benefited it?

Speaker 2

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

Speaker 5

Okay. Thanks. And I know you mentioned the reserve releases By accident year, could you give any color around the releases, particularly from the recent accident years?

Speaker 3

Yes. Charlie, this is Mike Sewell. So related to as I mentioned for the quarterly, it was 6.4 points. There was 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, so mainly those developments were Favorable and accident year 2020. But even with that, I'd be cautious with there's a lot of uncertainty With the pandemic and other things going on around there, if I look at the workers' compensation, That's one of our longest tails that we have.

Speaker 3

That one has favorable development That I would say goes over several accident years back a few years. So 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. And then lastly, commercial casualty, Really, they're looking at the paid loss, case reserve data over time are important factors for how that How those developed, those have been favorable in some of the more recent accident years, The last couple, not just the last one. But as we look at in total for the property casualty Business, you look at paid losses as a percent to incurred.

Speaker 3

It was up slightly for year to date 2021 versus last year, but it is below the 2017 Through 2019 averages. So you'll see that in our supplement.

Speaker 5

All right. Thanks guys.

Speaker 2

Thanks,

Operator

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

Speaker 6

Yes, good morning. Just a couple of questions. First on the E and S unit, 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 because those are sort of rare.

Speaker 2

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

Speaker 6

Okay. The second question I wanted to ask, 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 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

Speaker 5

from. Yes,

Speaker 7

Mark, this is Steve Spray. We're seeing it across our entire footprint. And I think it as you mentioned, there's a little bit of an easier comp From the pandemic year last year, but I just think it again 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.

Speaker 7

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

Speaker 6

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

Speaker 7

Sure. So on 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. Your next question comes from the line of James Bak from KBW. Your line is open.

Speaker 8

Thank you. So you mentioned that the percent of paid losses you 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 bring up some more detail on that.

Speaker 2

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 What we're seeing in terms of inflationary factors and set the best estimate that we can every quarter. And I think It's been a good track record now with 31 or 32 years in a row now where we've had favorable development.

Speaker 2

So we're very confident as an experienced team that hasn't changed over the years and I feel comfortable with the estimates that they're making.

Speaker 5

All right. Thank you.

Speaker 2

Thank you, James.

Operator

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

Speaker 2

Thank you. Thank you, Grace. Excellent job with the call. And thanks to all of you for joining us today. We look forward to speaking With you again on our Q4 call.

Speaker 2

Have a great day.

Operator

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

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Earnings Conference Call
Cincinnati Financial Q3 2021
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