Cincinnati Financial Corporation

Ladies and gentlemen, thank you for standing by. The conference will begin promptly at 1102 Eastern. Please continue to hold and thank you for your patience. Good morning and welcome to the Cincinnati Financial third quarter 2022 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 and touch the telephone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Dennis McDaniel, Investor Relations Officer. Please go ahead.

Hello, this is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our third quarter 2022 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, senfin.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 and Chief Executive Officer Steve Johnston, and then from Executive Vice President and 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 President Steve Spray, Senior Vice President of Investments Steve Soloria, and Cincinnati Insurance's 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. 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.

Thank you, Dennis. Good morning and thank you all for joining us today to hear more about our third quarter results. In addition to market volatility affecting the valuation of our investment portfolio, elevated inflation and natural catastrophe events affecting the industry also continue to pressure our property casualty insurance results. We remain well positioned to improve performance through ongoing focus on successfully executing profitable growth strategies for our insurance operations, similar to how we have managed past challenges. Our financial strength provides us the ability to maintain a long-term view, keeping a steady approach that can benefit all stakeholders. We reported a net loss of $418 million for the quarter due to the recognition of a reduction in the fair value of securities held in our equity portfolio. Non-GAAP operating income of $114 million for the third quarter of 2022 was down $95 million from a year ago, including catastrophe losses that were $19 million higher on an after-tax basis. Our 103.9% third quarter property casualty combined ratio was 11.3 percentage points higher than the 92.6% for the third quarter of last year. Inflationary pressures led to higher estimated ultimate losses and rising loss ratios on a current accident year basis. While we experienced another quarter of favorable development on prior accident years, it was less favorable than a year ago. We continue to respond with underwriting selection and pricing actions in addition to prudent reserving for estimated ultimate losses. In addition to various premium rate increase filings with the states, underwriters have increased expectations to address current inflationary trends in areas such as risk selection criteria, pricing of policies, and adjusting premium factors for changes in exposure. Commercial umbrella loss experience has been elevated in recent quarters. and it's challenging to determine relevant drivers given unusual business activity and general uncertainty as the pandemic waned. For example, the third quarter of 2022 included three very large claims with estimated losses averaging $9 million each, while elevated losses during the second quarter were driven more by a higher frequency of smaller claims. We continue to carefully underwrite commercial umbrella risks and respond promptly to adequately reserve for emerging loss patterns, which we expect will eventually lead to a return of profitability for our commercial umbrella business. Overall premium growth was strong and included average renewal price increases for each of our property casualty insurance segments. Cincinnati Insurance appointed agencies continued their outstanding production and our underwriters are focused on working to retain and grow profitable accounts while addressing areas where they judge pricing is not adequate, segmenting opportunities on a policy-by-policy basis. Consolidated property casualty net written premiums rose 14% for the third quarter of 2022. That included a 12% increase in third quarter renewal written premiums, including 11% each for our commercial lines and personal lines insurance segments. Higher renewal premiums included healthy increases for higher levels of insured exposures that are rising faster due to elevated inflation amounts. For example, our commercial property premium adjustments for rising costs of building materials so far this year are about double the level of last year. In addition to exposure increases, our commercial lines insurance segment continued to experience estimated average renewal price increases in the mid single-digit percentage range, somewhat higher than the second quarter. Our excess and surplus lines insurance segment continued in the high single-digit range, also higher than the second quarter. Personal lines average renewal price increases remained in the low single-digit range, with auto a little higher and homeowner a little lower than the second quarter. Personal auto insurance for the industry, including our book of business, generally needs higher premium rates to achieve profitability. Based on our rate filings that average low double-digit rate increases for policies effective beginning January 1, 2023, we expect the full year 2023 personal auto written premium effect will be an average premium rate increase of approximately 10%. The commercial line segment grew third quarter 2022 net written premium by 10%, with a combined ratio of 99.0%, reflecting elevated inflation effects and catastrophe losses 1.2 percentage points higher than a year ago. For our personalized segment, net written premium grew 15%, mostly from our continued planned expansion of high net worth business produced by our agencies. Its third quarter combined ratio of 104.5% also reflected elevated deflation effects while the catastrophe loss ratio was 4.1 percentage points lower than last year's third quarter. Our excess and surplus line segment had a 93.9% combined ratio and continued healthy growth with a third quarter 2022 net written premiums increase of 16%. Cincinnati Re and Cincinnati Global each experienced significant catastrophe losses from Hurricane Ian that drove their underwriting loss for the quarter. We expect catastrophe losses of that magnitude from time to time. Our estimate as of September 30 was within our expectations of loss potential for events of Ian's magnitude based on our models. Results of model effects estimating probable maximum losses are disclosed in our annual report on Form 10-K. Cincinnati Rewe grew third quarter 2022 net written premiums by 51%, while Cincinnati Global grew 21%, each having what we believe are good prospects for future profitability. Our life insurance subsidiary continued to perform quite well. Along with growth in term life insurance earned premiums of 4%, it produced third quarter 2022 net income of $21 million and nearly tripled operating income of a year ago. We continue to use the value creation ratio as our primary measure of long-term financial performance. VCR was negative 8.4% for the third quarter of 2022. Net income before investment gains Our losses made a positive contribution, but was again offset by lower investment valuations during the quarter. Next, Chief Financial Officer Mike Sewell will highlight several other points we consider important regarding our financial performance.