CINCINNATI FINANCIAL CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Operating Performance: Pleased with Q3 and first nine months' operating performance; combined ratio improving except for severe weather impact. Strong premium growth, investment income growth, and portfolio rebalancing efforts.
• Financial Metrics: Net income for Q3 2024 was $820 million; non-GAAP operating income $224 million (down $37 million y-o-y due to $86 million after-tax catastrophe losses). Property casualty combined ratio 97.4% (3.0 percentage points higher y-o-y), accident year combined ratio before catastrophe losses 86.8% (improved 0.9 percentage points Q3, 0.8 points nine-month).
• Premium Growth: Consolidated property casualty net written premiums grew 17%, with 16% growth in agency renewal premiums and 30% in new business premiums.
• Investment Income: Up 15% in Q3, dividend income down 1% due to net sales of equity securities, bond interest income up 21%. Total investment portfolio net appreciated value ~$7.3 billion; cash flow from operating activities $2 billion y-t-d.
• Expenses and Reserves: Third quarter 2024 property casualty underlying expense ratio decreased 0.2 percentage points. Net addition to property casualty loss and loss expense reserves y-t-d was $963 million, with $71 million of favorable reserve development in Q3.
• Capital Management: Returned $365 million to shareholders via dividends and share repurchases y-t-d, $120 million dividend paid earlier this month, 64th consecutive year of dividend increases.

Segment Performance

• Commercial lines: Net written premiums grew 11%, combined ratio 93.0% (improved by 2.2 percentage points, 1.3 points from lower catastrophe losses).
• Personal lines: Net written premiums grew 29%, combined ratio 110.3% (10.4 percentage points higher than last year due to higher catastrophe losses).
• Excess and surplus lines: Net written premiums grew 23%, combined ratio 95.3% (less profitable than prior year due to higher catastrophe losses and unfavorable reserve development).
• Cincinnati REIT: Net written premiums grew 5%, combined ratio 95.6% (nine-month combined ratio 81.5%), $38 million of catastrophe losses including ~$19 million from Hurricane Helene.
• Cincinnati Global: Combined ratio 66.6%, net written premiums grew 12%.
• Life insurance subsidiary: Profitable quarter, net income $20 million, term life earned premium growth 4%.

Guidance

• Estimated pre-tax incurred losses from Hurricane Milton in Q4: $75 million to $125 million; direct business written by Cincinnati Insurance Company <$15 million, Cincinnati REIT >half of the estimate.
• Third quarter 2024 value creation ratio (VCR) 9.0%, nine-month total 17.8%.

Risks

• Severe Weather: Impact of events like Hurricane Helene and Milton causing catastrophe losses.
• Litigation and Social Inflation: Uncertainty in litigation costs, social inflation, and legal system abuse affecting commercial casualty combined ratio.
• E&S Volatility: Inherent volatility in excess and surplus lines leading to unfavorable reserve development.
• Macro Uncertainties: General macroeconomic and industry uncertainties impacting underwriting profitability across segments.

Question and Answer

Q: Michael Phillips from Oppenheimer asked about commercial casualty reserve development and premium growth.

A: Mike Sewell and Steve Spray discussed that there was no material prior accident year reserve development in commercial casualty, with higher case incurred losses spread across accident years due to severity, and strong pricing with runway for more rate in commercial casualty lines.

Q: Mike Zaremski from BMO inquired about investment portfolio sell-down and E&S segment growth.

A: Steve Soloria explained it was standard prudent portfolio management, with opportunistic trimming of equities and reallocating funds, and E&S segment growth with 90% casualty, inherent volatility, but a strong profitability track record.

Q: Gregory Peters from Raymond James asked about personal lines business profile and agency growth.

A: Steve Spray discussed personal lines business evolution, diversification across middle market and high net worth, focus on agency relationships, and commitment to expanding distribution without diluting the franchise.

Q: Jing Li from KBW asked about E&S unfavorable development.

A: Steve Spray noted that E&S casualty had case incurred losses emerging higher than expected, with inherent volatility but a strong profitability track record and prudent reserving.

Q: Grace Carter from Bank of America inquired about commercial casualty core loss ratio trends.

A: Steve Spray explained that commercial casualty core loss ratio was impacted by macro uncertainties like litigation costs and social inflation, with typical refinement of picks as more data is received, and the third quarter level reflecting industry-wide uncertainty.