Cincinnati Financial Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Cincinnati Financial Corporation's fourth quarter and full year 2020 earnings conference call. At this time, all participants have been placed 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 zero. I would now like to hand the conference over to Dennis McDaniel, Investor Relations Officer. Thank you. Please go ahead, sir.

Hello, this is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our 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, sendfin.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 Chairman, President, and Chief Executive Officer Steve Johnson, 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 Shambaugh, and Senior Vice President of Corporate Finance Teresa Hopper. 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, our reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and therefore does not reconcile the GAAP. Now, I'll turn the call over to Steve.

Thank you, Dennis. Good morning, everyone, and thank you for joining us today. Everyone knows that this past year was full of challenges. We work closely with the independent agents who represent us to react quickly to changing needs of their clients as the pandemic progressed and to keep business flowing. The communities we serve saw an unusually high level of catastrophe activity. While no one likes to witness the pain and destruction these events bring, it is when our field claims representatives shine, delivering support with empathy and warmth. Our headquarters associates remain focused on our key priorities, even though they've had to adapt to working at home, balancing family and business responsibilities in new ways. Despite those challenges, our associates and agents responded with determination and focus, helping us to produce the healthy financial performance we reported today. Net income for the fourth quarter of 2020 rose 68% compared with the fourth quarter a year ago, including increases in the fair value of our equity security portfolio. Non-GAAP operating income increased 29%, or $59 million for the quarter, despite higher catastrophe losses reducing it by $19 million more than last year on an after-tax basis. Our 87.3% property casualty combined ratio was 4.3 percentage points better than a year ago, even with a catastrophe loss ratio that was 1.4 points worse. The current accident year loss and loss expense ratio before catastrophe loss effects continued to improve and was 3.9 percentage points better than last year. Some of that is due to improved underwriting, and some of it is attributable to the pandemic, such as fewer auto accidents resulting from reduced driving. We believe a major reason that our underwriting performance continues to improve over time is from the ongoing segmentation of our business, retaining more profitable accounts and getting better pricing on less profitable business, while walking away from opportunities when we judge profit margins to be too thin. At the same time, our financial results continue to benefit from efforts to diversify risks by product line and geography. We believe we can successfully balance prudent underwriting and business growth to maintain the 2020 combined ratio before catastrophe effects for a 2021 GAAP combined ratio in the low to mid 90% range. We also believe our 2021 property casualty 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. Turning to performance by operating unit, we work to earn new business by offering superior service, a focus on personal relationships, and a commitment to helping agents attain success. Consolidated property casualty net written premiums rose 7% in the fourth quarter of 2020 and 6% for the year. We believe our premium growth in each of our insurance segments included underwriting and pricing discipline. In 2020, we again managed our business to healthy levels of policy retention and with meaningful 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. The combined ratio for our commercial line segment was 0.4 percentage points higher compared with the fourth quarter a year ago due to an increase of 3.8 points for the catastrophe loss ratio that included 2.3 points for the Nashville bombing. Net written premiums grew 3% for the quarter, despite the fact that the pandemic continued to cause adverse economic effects. Our personal line segment grew fourth quarter net written premiums by 5%. Our high net worth business continues to progress as planned and included $3 million in fourth quarter excess and surplus lines homeowners policies we began offering in early 2020. The combined ratio for personal lines was 18 percentage points better than the fourth quarter a year ago, including catastrophe losses that were 6.3 points better. Our excess and surplus line segment again performed well, producing an 83.2% fourth quarter combined ratio and growing fourth quarter and full year net written premiums by 15%. Both Cincinnati Re and Cincinnati Global experienced strong growth in 2020, in excess of 25% on a full year basis. Conditions and markets where they operate improved during the year, and both businesses are well positioned for targeted profitable growth in 2021. While catastrophe and pandemic losses took a toll on both of those businesses, Cincinnati Re had an underwriting profit for the year. Cincinnati Global experienced an underwriting loss in 2020, but looking back since our acquisition, it's only about $3 million shy of an underwriting profit and is profitable if you consider its investment income. Our life insurance subsidiary continued its strong performance with fourth quarter net income up 67% from last year and non-GAAP operating income up 30%. Term life insurance earned premiums grew by 6%. The fourth quarter was again active regarding developments in the litigation landscape of pandemic-related business interruption claims. We continue to vigorously defend the lawsuits filed against the company that seek coverage for economic losses caused by the pandemic. Recent courts have granted several of our motions to dismiss based on lack of physical loss or damage to property, and plaintiffs have voluntarily dismissed others. In Ohio, a federal court in the Northern District recently granted our request to certify a question to the Ohio Supreme Court. If accepted, the state Supreme Court will have an opportunity to settle the question under Ohio law of whether the presence of the coronavirus constitutes direct physical loss or damage to property, and thereby answer the basic question underlying the majority of business interruption claims. In those cases that have preceded past initial motions, including North State Deli case in North Carolina that is working its way through the appellate process, we continue to believe that business interruption coverage under our policy does not apply. We feel that courts ultimately should decide that economic loss alone without physical alteration of property does not constitute the direct physical loss or damage to property that is required to trigger coverage under a commercial property policy of insurance. We are confident in our legal strategy given our understanding of the law and decisions made in the majority of other BI court cases throughout the country to date. To the extent we have setbacks, we'll continue to pursue the judicial process. 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 2021 are fairly similar to 2020, except that they now include exclusions for communicable diseases such as viruses and cyber losses. Keep in mind that parts of these treaties include terms and conditions that cover multiple years. As a result, $114 million of coverage in effect for 2021 does not exclude communicable diseases or cyber losses. Rates for our casualty treaty rose in the mid-single-digit percent range. Rates rose in the high single-digit percent range for our property treaties, and we expect 2021 seeded premiums for these casualty and property treaties in total to be approximately $103 million. I'll conclude my prepared remarks for now with the value creation ratio, our primary measure of long-term financial performance. Our VCR was 11.7% for the fourth quarter of 2020, including 9.1 percentage points contributed by improved valuation of our investment portfolio. That brought our full-year VCR to 14.7%. Now, our Chief Financial Officer, Mike Sewell, will highlight other areas of financial results.