Cincinnati Financial Corporation

Good morning. My name is Catherine, and I will be your conference operator today. At this time, I'd like to welcome everyone to the fourth quarter and full year 2018 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question at that time, please press star and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I'd now like to turn the call over to Mr. Dennis McDaniel, Investor Relations Officer at Cincinnati Financial. You may begin your conference.

Hello. This is Dennis McDaniel, and we thank you for joining us for our fourth quarter and full year 2018 earnings conference call. Late yesterday, we issued a news release on our results, along with our supplemental financial package, including our year-end investment portfolio. To find copies of any of these documents, please visit our investor website, centhen.com. 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 Steve Johnston, President and Chief Executive Officer, 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 Executive Vice President, J.F. Shear, Chief Claims Officer, Marty Mullen, Chief Insurance Officer, Steve Spray, Senior Vice President of Corporate Finance, Teresa Hoffer, and Chairman of the Board, Ken Stecker. First, please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to these risks and uncertainties, we direct your attention to our news release and to our various filings with the SEC. Also a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and therefore is not reconciled to GAAP. Now I'll turn over the call to Steve.

Good morning and thank you for joining us today to hear more about our fourth quarter results. Operating results for the fourth quarter of 2018 represent a strong finish. Despite reporting a net loss of $452 million because of the accounting requirement for changes in the fair value of equity securities. Non-GAAP operating income improved for the quarter and on a full year basis it was 21% higher than 2017. We are encouraged by our 2018 financial results and continue to be confident in our strategy and in our ability to execute it well. Improved operating performance for the fourth quarter and the full year 2018 again reflected steady efforts to carefully underwrite and price policies, provide outstanding claim service, manage investments, and support our agencies. Our fourth quarter 93.9% combined ratio helped lower full year 2018 to 96.4%, 1.1 points better than 2017. Slightly more favorable catastrophe weather effects in 2018 contributed one-tenth of a point while improved underwriting was reflected in various underlying measures. We continue to further segment our renewal and new business opportunities using pricing precision and risk selection decisions that combine data models and underwriter expertise on a policy by policy basis. That work is vital to our further We believe we can successfully balance prudent underwriting and business growth to improve on the 2018 combined ratio before catastrophe effects for a 2019 GAAP combined ratio below 95%. We also believe our 2019 property casualty premium growth rate can be within a percentage point of 2018. We recognize that weather and significant changes in industry market conditions that influence insurance policy pricing trends are some variables that will affect the property casualty results we ultimately report. In 2018, we continued to manage our business to healthy levels of policy retention and with average renewal price increases for each of our property casualty segments. Policy retention rates for commercial lines were similar to a year ago, continuing near the high end of the mid-80% range. For personal lines, our policy retention during the second half of 2018 declined from recent year levels, reflecting increased underwriting discipline and was near the high end of the mid-80% range. Our long-term growth strategy includes appointing agencies in areas where we are underrepresented Taking care to preserve relationships with established agencies and the franchise-like benefit they value. In 2018, we appointed 167 new independent agencies. Similar to recent years, in 2019, we plan to appoint approximately 100 additional agencies that will offer most or all of our property casualty insurance products and another 80 that market only our personalized products. primarily ones with a high net worth focus. We continue to earn new business through our agencies from a combination of superior service and expansion of insurance products for clients of those agencies. For full year 2018, each of our property casualty segments reported record levels of new business written premiums and overall property casualty net written premiums grew 4%. For renewal business in the fourth quarter, our underwriters continued to generate overall price increases. Commercial lines estimated average price increases for the fourth quarter were similar to the third quarter. Combined ratio for our commercial line segment improved by a full percentage point for the year 2018 to 95.4%, despite the ratio for catastrophe losses increasing by 0.8%. Our personal line segment continued to experience a rise in average rate changes as the fourth quarter of 2018 was similar to the third quarter. Personal line's fourth quarter combined ratio was profitable. While it was above 100% for the year 2018, it proved compared with year end 2017 as we continued to work for performance improvement. Our excess and surplus line segment Thank you for joining us. For a year with global insured catastrophe losses roughly twice the long-term historical average. Our life insurance subsidiary again grew term life insurance premiums, its largest product line, with fourth quarter earned premium growth of 13% and full year 2018 growth at 9%. This business supports account retention for our agents and provides steady contributions to our earnings. As it has less correlation to weather than our property casualty business. On January 1st of this year, we again renewed each of our primary property casualty treaties that transfer part of our risk to reinsurers. For both our per-risk treaties and our property catastrophe treaty, terms and conditions for 2019 are similar to 2018. While we did receive some modest rate reductions, we expect the amount of seated premiums For both years to be similar because our directorate and premiums subject to those treaties are growing. The full year 2018 value creation ratio, our primary measure of long-term financial performance was negative 0.1%. The contribution from operating income was a positive 6.7%. The VCR in total was below our long-term target range due to the decline in securities market value. However, the VCR average for the past five years was within the target range. In conclusion, finishing the year well reflects areas of ongoing operational improvement. Despite the fourth quarter downturn in the stock market, the good performance of our insurance business was a key factor in the recent decision by our Board of Directors to reward shareholders with a 5.7% increase in the regular cash dividend declared earlier this month. Next, our Chief Financial Officer, Mike Sewell, will highlight several important points about our financial performance.