EarningsCall · CINF Q3 2021

spk01: Excuse me, this is the operator. Today's conference is scheduled to begin shortly. Please continue to stand by and thank you for your patience. Once again, this is the operator. Today's conference is scheduled to begin shortly. Please continue to stand by and thank you for your patience. Thank you. Thank you. 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 speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star then the number one on your telephone. And if you require any further assistance, please press star zero. I would like to hand the call over to your speaker today, Mr. Dennis McDaniel, Investor Relations Officer. Sir, you may proceed.

spk02: Hello, this is Dennis McDaniel, Investor Relations Officer at Cincinnati Financial. Thank you for joining us for our third quarter 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, cynthin.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 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, Theresa 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 has not reconciled the gap. Now, I'll turn over the call to Steve.

spk11: Thank you, Dennis. Good morning, and thank you for joining us today to hear more about our third quarter 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. Net income for the third quarter of 2021 fell $331 million compared with the third quarter of last year, due to $457 million 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 $1.3 billion for the first nine months of 2021 compared with a year ago, despite the third quarter decrease. Non-GAAP operating income for the third quarter of 2021 more than tripled, up $146 million or 232% versus a year ago, with lower catastrophe losses on an after-tax basis contributing $31 million of the increase. Our 92.6% third quarter 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 first nine 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 helped us grow ahead of industry estimates. Consolidated property casualty net written premiums rose 10% in the third 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 third quarter continued 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 second quarter. Our third quarter personalized segment average renewal price increases slowed a little compared with the second 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. Our commercial line segment had an outstanding quarter with this 80.6% combined ratio improving by 21.8 percentage points compared with the third quarter a year ago and growing net written premiums by 10%. For our personal line segment, third quarter net written premiums grew 7% as it continued to benefit from planned expansion of high net worth business produced by our agencies. Its third quarter 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 third quarter, and for the first nine months of 2021, our personal line segment in total had an underwriting profit. Our excess and surplus line segment produced a sub-95% combined ratio, for the third quarter and the first nine months of the year, and grew third quarter net written premiums by 30%. Cincinnati RE and Cincinnati Global each grew net written premiums in the third quarter 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 third quarter 2021 net income of $11 million 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 third quarter and the first nine months of the year. VCR through September 30th 2021 was 12.4%, already reaching our annual average target range of 10% to 13%. Now, our Chief Financial Officer, Mike Sewell, will add perspective on some other areas of our financial performance.

spk07: Thank you, Steve, and thanks to all of you for joining us today. Investment income grew nicely during the third quarter of 2021, up 7% compared with the same period a year ago. Third quarter dividend income was up 11%, and net purchases for the equity portfolio totaled $153 million for the first nine months of the year. Interest income from our bond portfolio grew 7%, and the pre-tax average yield was 4.06%, up three basis points from the third quarter a year ago. The average pre-tax yield for the total of purchased taxable and tax-exempt bonds during the third quarter of 2021 was 3.43 percent. Investing in the fixed maturity portfolio continues to be a priority with net purchases during the first nine months of the year totaling $694 million. Valuation changes for our investment portfolio portfolio during the third quarter of 2021 were modestly unfavorable for both our stock and bond portfolios. The overall third quarter net loss was $158 million before tax effects, including $105 million for our equity holdings and $80 million for our bond holdings. At the end of the third quarter, Total investment portfolio net appreciated value was approximately $6.7 billion, including $5.8 billion for equity securities. Cash flow was very strong in the third quarter, as it has been all year. It contributes to investment income and was a major factor in the 7 percent increase in interest income we reported for the third quarter. Cash flow from operating activities for the first nine months of 2021 generated $1.5 billion, a 36% increase compared with a year-ago period. Expense management is another area we focus, always trying to optimize the balance of strategic business investments and expense controls. The third quarter 2021 property casualty underwriting expense ratio was 0.9 percentage points higher than last year's third quarter, 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. During the third quarter of 2021, we experienced $102 million 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 first nine months of the year was favorable by $225 million for 2020, $46 million for 2019, $39 million for 2018, and $21 million 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 third quarter, we repurchased approximately 100,000 shares at an average price per share of $119.03. I'll conclude by prepared remarks, as I typically do, with a summary of third quarter contributions to the book value per share. They represent the main drivers of our value creation ratio. Property casualty underwriting increased book value by 59 cents. Life insurance operations increased book value 5 cents. Investment income, other than life insurance and net of non-insurance items, added 81 cents. Net investment gains and losses for the fixed income portfolio decreased book value per share by 39 cents. Net investment gains and losses for the equity portfolio decreased book value by 51 cents. And we declared 63 cents per share in dividends to shareholders. The net effect was a book value decrease of eight cents per share during the third quarter. to $73.49 per share. And now I'll turn the call back over to Steve.

spk11: Thank you, Mike. The COVID-19 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 Chambeau, Marty Hollenbeck, and Teresa Hopper. Grace, please open the call for questions.

spk01: Absolutely. As a reminder, to ask a question, you will need to press Start and the number 1 on your telephone keypad. Again, that will be Start and the number 1 on your telephone keypad. The first question comes from the line of Paul Newsome from Piper Sandler. Your line is open.

spk09: 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 with trying to get great and getting pushback from the regulators because obviously there was kind of effectively a windfall last year, but that's, you know, I think obviously temporary, but it doesn't really go into the math of how you file rates. Any thoughts on that? And are you seeing some of the same issues that some others are seeing?

spk11: Well, I would say our relationships with our regulators are good. It's a general statement that we are doing fine in 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 vis-a-vis getting adjustments to our rating plans approved.

spk09: 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 auto showing up in the commercial side of the house. Any thoughts on that? Do you think that's a reasonable assumption, and does it show up in any way in your own numbers?

spk11: We certainly see the prospect. There's social inflation. There's the inflation of the costs and goods that we use to settle claims 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, you know, as we look at what we see to be lost cost trends, we try to be very perspective and look forward into what we think lost 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 lost cost trends in each of our segments.

spk09: Great. Congrats on the core. Always sound like it. Appreciate your insights. Thank you, Paul.

spk01: Thank you. Next up we have Mike Zaramski from Wolf Research. Your line is open, sir.

spk03: Hey, guys. This is actually a Charlie letterer on for Mike. Good morning. Good morning, Charlie. So for my first question, can you talk about the sustainability of the strong underlying margins? Were there any notable current year reserve development that benefited it?

spk11: We feel good, Charlie, about the sustainability of our results as we look forward with estimates of lost cost trends and pricing and feel comfortable in making our best estimates of our reserves. We're very optimistic for the future performance of the underwriting of the company.

spk03: Okay, thanks. I know you mentioned the reserve releases by accident year. Could you give any color around the releases, particularly from the recent accident years?

spk07: Yeah, Charlie, this is Mike Sewell. So, you know, related to, you know, as I mentioned for the quarterly, it was 6.4 points. There was, you know, 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 in 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, you know, that's one of our longest, you know, tails that we have. 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, you know, really there looking at the paid loss, case reserve data over time are important factors for how that, how those develop. Those have been favorable in some of the more recent accident years, the last couple, not just the last one. But, you know, as we look at in total for the property casualty business, you look at paid losses as a percent to incurred. 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.

spk05: All right. Thanks, guys.

spk01: Thanks, Charlie. Your next question comes from the line of Mark Dwell from RBC Capital. Mark, your line is open.

spk08: Yeah, good morning. Just a couple of questions. First on the ENS unit, it wasn't very much in dollar terms, but there was a reserve edition there. I was wondering if you could talk about that in a little more detail because those are sort of rare.

spk11: I just think as we look at the environment, Mark, we see a little bit maybe of a, I don't know if you'd call it, 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.

spk08: 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 from.

spk10: Yeah, Mark, this is Steve Spray. You know, we're seeing it across our entire footprint. And I think it, as you mentioned, you know, there's a little bit of an easier comp from the pandemic year last year. But I just think, 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. Our field reps, our field underwriters, we use that interchangeably, have the same pricing tools that our renewal underwriters have here. We feel good about the pricing of the new business that we're writing. I think it's just continued solid execution, quite frankly, across all of our segments on the new business front. And it goes to those deep relationships we have with our agents.

spk08: Thanks for the color on that. And then one other question, also kind of relating mainly to renewals. you know, the extent that you're getting, you know, premium audits that are flattering results a little bit. Can you just talk about a kind of exposure unit growth and to what degree that impacted the overall premium growth in the quarter?

spk10: Sure. So for commercial lines all in, I would say that for the premium increase, it's about half rate and about half exposure.

spk01: Thank you. Once again, in order to ask a question, please press star, then the number one on your telephone keypad. Again, that will be star, then the number one on your telephone keypad. Your next question comes from the line of James Beck from KBW. Your line is open.

spk04: Thank you. So you mentioned that the percent of paid loss is to 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 some more detail on that.

spk11: 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. incur losses, try to get an estimate for, you know, what we're seeing in terms of inflationary factors and set the best estimate that we can every quarter. And I think, you know, it's been a good track record now with 31 or 32 years in a row now where we've had favorable development. So we're very confident as an experienced team that hasn't changed over the years. and feel comfortable with the estimates that they're making. Thank you, James.

spk01: 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.

spk11: 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 fourth quarter call. Have a great day.

spk01: Thank you, presenters. This concludes today's conference call. Thank you all for joining Human Rights Disconnect. Thank you. Thank you. Thank you. Thank you. © transcript Emily Beynon Thank you. Thank you. Thank you. music Thank you. So, 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 speaker's remarks, there will be a question and answer session. So as a question during the session, you will need to press star then the number one on your telephone. And if you require any further assistance, please press star zero. I would like to hand the call over to your speaker today, Mr. Dennis McDaniel, Investor Relations Officer. Sir, you may proceed.

spk02: Hello, this is Dennis McDaniel, Investor Relations Officer at Cincinnati Financial. Thank you for joining us for our third quarter 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, centhen.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 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, Theresa 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 has not reconciled the gap. Now, I'll turn over the call to Steve.

spk11: Thank you, Dennis. Good morning, and thank you for joining us today to hear more about our third quarter 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. Net income for the third quarter of 2021 fell $331 million compared with the third quarter of last year due to $457 million 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 $1.3 billion for the first nine months of 2021 compared with a year ago, despite the third quarter decrease. Non-GAAP operating income for the third quarter of 2021 more than tripled, up $146 million or 232% versus a year ago, with lower catastrophe losses on an after-tax basis contributing $31 million of the increase. Our 92.6% third quarter 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 first nine 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 helped us grow ahead of industry estimates. Consolidated property casualty net written premiums rose 10% in the third 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 third quarter continued 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 second quarter. Our third quarter personalized segment average renewal price increases slowed a little compared with the second 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. Our commercial line segment had an outstanding quarter with this 80.6% combined ratio improving by 21.8 percentage points compared with the third quarter a year ago and growing net written premiums by 10%. For our personal line segment, third quarter net written premiums grew 7% as it continued to benefit from planned expansion of high net worth business produced by our agencies. Its third quarter 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 third quarter, and for the first nine months of 2021, our personal line segment in total had an underwriting profit. Our excess and surplus line segment produced a sub-95% combined ratio of the third quarter and the first nine months of the year and grew third quarter net written premiums by 30 percent. Cincinnati RE and Cincinnati Global each grew net written premiums in the third quarter 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 third quarter 2021 net income of $11 million 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 third quarter and the first nine months of the year. VCR through September 30th 2021 was 12.4%, already reaching our annual average target range of 10% to 13%. Now, our Chief Financial Officer, Mike Sewell, will add perspective on some other areas of our financial performance.

spk07: Thank you, Steve, and thanks to all of you for joining us today. Investment income grew nicely during the third quarter of 2021, up 7% compared with the same period a year ago. Third quarter dividend income was up 11%, and net purchases for the equity portfolio totaled $153 million for the first nine months of the year. Interest income from our bond portfolio grew 7%, and the pre-tax average yield was 4.06%, up three basis points from the third quarter a year ago. The average pre-tax yield for the total of purchased taxable and tax-exempt bonds during the third quarter of 2021 was 3.43 percent. Investing in the fixed maturity portfolio continues to be a priority with net purchases during the first nine months of the year totaling $694 million. Valuation changes for our investment portfolio portfolio during the third quarter of 2021 were modestly unfavorable for both our stock and bond portfolios. The overall third quarter net loss was $158 million before tax effects, including $105 million for our equity holdings and $80 million for our bond holdings. At the end of the third quarter, Total investment portfolio net appreciated value was approximately $6.7 billion, including $5.8 billion for equity securities. Cash flow was very strong in the third quarter, as it has been all year. It contributes to investment income and was a major factor in the 7 percent increase in interest income we reported for the third quarter. Cash flow from operating activities for the first nine months of 2021 generated $1.5 billion, a 36% increase compared with a year-ago period. Expense management is another area we focus, always trying to optimize the balance of strategic business investments and expense controls. The third quarter 2021 property casualty underwriting expense ratio was 0.9 percentage points higher than last year's third quarter, 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. During the third quarter of 2021, we experienced $102 million 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 first nine months of the year was favorable by $225 million for 2020, $46 million for 2019, $39 million for 2018, and $21 million 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 third quarter, 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 third quarter contributions to the book value per share. They represent the main drivers of our value creation ratio. Property casualty underwriting increased book value by 59 cents. Life insurance operations increased book value 5 cents. Investment income, other than life insurance and net of non-insurance items, added 81 cents. Net investment gains and losses for the fixed income portfolio decreased book value per share by 39 cents. Net investment gains and losses for the equity portfolio decreased book value by 51 cents. And we declared 63 cents per share in dividends to shareholders. The net effect was a book value decrease of 8 cents per share during the third quarter. to $73.49 per share. And now I'll turn the call back over to Steve.