Cincinnati Financial Corporation

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter and full year 2019 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I'd now like to hand the conference over to your speaker for today, Mr. Dennis McDaniel, Cincinnati Financial's Investor Relations Officer. Thank you, sir. Please go ahead.

Hello, this is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our fourth quarter and full year 2019 earnings conference call. Late yesterday, we issued a news release on our results along with our supplemental financial package, including our year-end investment portfolios. To find copies of any of these documents, please visit our investor website, sinfin.com slash 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 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 Chairman of the Board, Ken Stecker, Chief Investment Officer, Marty Hollenbeck, and Cincinnati Insurance's Chief Insurance Officer, Steve Spray, Chief Claims Officer, Marty Mullen, and Senior Vice President of Corporate 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. 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. Thank you for joining us today to hear more about our 2019 results. Operating results and overall financial performance for the fourth quarter and full year were excellent. and we also see reasons for confidence regarding future performance due to our proven strategy and demonstrated experience in execution. Net income for the fourth quarter rose nearly $1.1 billion including more than $1 billion for changes in the fair value of equity securities. Non-GAAP operating income improved 28% for the quarter. and on a full year basis it was 26% higher than 2018. Strong 2019 operating performance for both the fourth quarter and for the year again reflected efforts to carefully underwrite and price policies, provide outstanding service to our agencies and manage investments well. We also continue to benefit from risk diversification by product line and geography. Our fourth quarter 91.6% combined ratio helped lower full year 2019 to 93.8%, 2.6 points better than 2018. More favorable catastrophe weather effects contributed slightly more than one full percentage point for the year, while improved underwriting was reflected in various underlying measures. We continue to further segment our renewal and new business opportunities. Pricing precision and risk selection decisions that combine data models and underwriter expertise on a policy by policy basis are benefiting our underwriting results. We believe we can successfully balance prudent underwriting and business growth to maintain or improve on the 2019 combined ratio before catastrophe effects for a 2020 GAAP combined ratio in the low to mid 90% range. We also believe our 2020 property casualty premium growth rate can be 6% or more. We recognize that weather and significant changes in industry market conditions that influence insurance policy pricing trends are some of the variables that will affect the property casualty results we ultimately report. In 2019, we again managed our business to healthy levels of policy retention with average renewal price increases for each of our property casualty segments. Policy retention rates for both commercial and personal lines were similar to a year ago, continuing near the high end of the mid 80% range. Part of our strategy for long-term growth is appointing more agencies in areas where we are underrepresented while taking care Preserve relationships with established agencies and the franchise-like benefit they value. In 2019, we appointed 187 new independent agencies. In 2020, we plan to appoint approximately 125 additional agencies that will offer most, if not all, of our property casualty insurance products, and another 35 that market only our personalized products, primarily ones We continue to earn business through our agencies from a combination of superior service and expansion of insurance products for clients of those agencies. For full year 2019, new business written premium growth was strong, and overall property casualty net written premiums grew 10%. For renewal business, Commercial Line's estimated average price increases for the fourth quarter were again in the low single-digit percentage range, and the second half of the year was higher than the first half. The 2019 combined ratio for our Commercial Line segment improved by 2.5 percentage points for the year to 92.9%, with about half of the improvement due to lower catastrophe losses. Our personalized segment continued to experience average rate increases in the mid-single digit range, with the fourth quarter 2019 similar to the third quarter. The personalized combined ratio was profitable for both the quarter and year, and we're working towards further improvement. Our excess and surplus line segments had another excellent year, including growth and net written premium exceeding 20%, and a 2019 combined ratio of 81.5%. Cincinnati RE continued to grow as planned with a fourth quarter combined ratio below 100% in full year 2019 in the low 90s. Cincinnati Global had another profitable quarter in its post-acquisition combined ratio in the low 80s. Our life insurance subsidiary again grew term life insurance premiums, its largest product line with fourth quarter earned premium growth of 4% and full year 2019 growth at 8%. Cincinnati Life produced $39 million of full year net income and supports account retention for our agents while contributing to earnings with 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 2020 were mostly similar to 2019, except for not renewing our cap bond. Instead, we added approximately $90 million of broader coverage through our property catastrophe treaty, plus up to $60 million of coverage on top of that for earthquake events. Rates for our casualty treaty were nearly flat. Rates were somewhat higher for our property treaties, but we expect the total amount of 2020 seeded premiums to be fairly similar to 2019. I'll conclude with the value creation ratio, our primary measure of long-term financial performance. It reflects an outstanding year. Improved operating results in favorable securities markets resulted in a fourth quarter 2019 VCR of 6.5%. and a VCR of 30.5% for the year, which is well above our targeted annual average of 10 to 13%. The contribution from our operations measured as net income before investment gains was up 8.9% for the year, up 1.5 percentage points from a year ago. While our equity portfolio benefited VCR this year, we understand the risk of short-term variability due to market effects. We continue to believe this potential for long-term appreciation and dividend income growth is important for creating value for shareholders over time. Our confidence is also reflected in the recent decision by our Board of Directors to reward shareholders with a 7.1% increase in the regular cash dividend declared last month. Next, our Chief Financial Officer, Mike Sewell, will highlight some important aspects of our financial performance.