CINF - Earnings call transcript Q4 2017 | Cincinnati Financial Corporation

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Operator

Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] Thank you. Dennis McDaniel, Investor Relations Officer, you may begin your conference.

Dennis McDaniel

Hello. from McDaniel Dennis is Cincinnati Financial. This for earnings conference you joining us XXXX quarter fourth our call. for Thank Late yesterday, quarter-end we along issued a news release supplemental package, with on financial including portfolio. our investment our our results website, of copies documents, our of To cinfin.com/investors. find any please these visit investor The is Quarterly in the Results far left. information on navigation menu the to shortest link route the the Chief On Executive Officer; Chief this President Financial Mike Johnston, Officer, and call, you’ll Steve first Sewell. then hear from from and ask investors After on participating questions. their may call remarks, prepared the some Board, At made Marty others Chief time, Chief be that responses including by Insurance’s Officer, in may us, Insurance with Chairman Investment Officer, Hollenbeck; Cincinnati the Ken room and of J.F. the Stecher; the Officer, Scherer; President and Accounting, call. Marty Vice on Senior Mullen; Chief Theresa Claims of also Hoffer are

of with we to are in matters to I’ll note your First, filings release. Steve. is uncertainties. GAAP. be statements certain some uncertainties, not now, a please looking. data to our forward release respect to risks that measures call and non-GAAP the accounting direct today accounting With risks Statutory involve the our and of prepared provided forward-looking reconciled various reconciliation with These with and attention news these discussed to and was therefore, news statutory And rules is SEC. to turn accordance the Also, the

Steve Johnston

ended net more book Thank increase $XX.XX from income you, a year we XX% reform. Dennis, of deferred high of new and securities reached benefit $XXX fourth our markets, a liabilities per Reflecting fourth about a record us rising hear due significantly XXXX tax good earnings million for quarter revaluation plus Results in for up at to income of you a quarter valuations to share. morning. the value on operating our also record-high Thank note, today from results. for non-GAAP joining net with tax

increase from year portfolio. percentage rising reached million Investment of income of points from stock XX.X% effects in for of with benefiting seven for strong markets, securities X.X or Each favorable from just XX.X% both with $XXX our year record items the level. full our I’ll portfolio a insurance highlighted, ratio into and contributions which shareholders, considered from was dividend also the periods I factored and paid from operations, measure VCR, is year recent of our full by Board dividend a the at primary in January. valuations performance points declared a for the our in Our fourth financial moment, reward X% was cash including Directors by percentage which our tax quarter XXXX, to in reform. long-term VCR performance plus cover X.X special of points approximately and regular bond a included and value creation decisions XXXX December

our premiums, continue percentage We three XXXX quarter than fourth more ratio property steadily grow points. to casualty by combined and improved

the XXXX on year X.X%, business compound range. low- rate. at X% industry Our net improve year ratio XXXX balance successfully fourth a net prudent property a growth accident development of annual to a years. combined mid-XX% quarter believe we catastrophe GAAP year contributed five in We ratio favorable reported XX.X% underwriting growth of premiums, our nearly to before double to XXXX rate and reserve on to the Growth consecutive XXth we for effects XX.X% can average combined five-year casualty’s and helped improve for full combined of XX.X%, prior XXXX written ratio in

casualty can premium growth property a point XXXX. We rate our be also of within percentage XXXX believe

we will XX in Our are affect pricing weather, insurance We variables market results years. of the some policy ultimately XXXX above catastrophe trends average ratio changes that loss significant casualty influence conditions report. was full the point industry that previous the a that the recognize property the

appreciate a for profitability written single are intensifying and for XXXX service, to apply more as company policies models are several policy to includes bundling with of business to XXXX, or needed. predictive package which insurance many and and provide while line to we as that obtain in of to three well have important a we we dealing line effects, percentage Agencies pricing also points ended business. benefits are indicate catastrophe ratios individual are during clients efforts for addressing which and Most and rose right watching account each It’s one our seek coverages relatively a of opinion, on coverages While our there direction. combined adequacy expertise our pricing. renewal insureds. or rate retain terms total. in higher seek accounts within package our protection with for our policy closely policies each principles are weaker analytics, underwriting before than segmentation basis, positives, We conditions manage move the account and the of as relatively on In as underwriters to expiring

pricing priced price and to single-digit adequacy, Those price our at casualty bulk commercial a direct small As the line decrease. to low and business. the is details our price coverages, high about the models while are of attention adequately continue casualty priced for and of Results least liability auto The largest line at general represent in of an precision adequately our most near percentage range, of indicate of example average percentage additional or general business improvement liability our efforts percentage rate our show price our increases portion business. the of liability general to models starting pricing single-digit component part I’ll share averaged to some lines XXXX segmentation will increases increases of according which the range. business averaged efforts, ongoing our in a renewal commercial from

still same business. focused casualty of our the benefit and efforts Although we auto successfully will we’ve to believe commercial lines profitable, from Compensation Worker’s applied

in of year months. accident ratio supplemental to relative XXXX XXXX year XX expenses our percentage a Page financial On commercial package, point casualty’s see casualty. total and can commercial loss for measured for XX profitability accident at you Regarding increase the losses X.X%

of also see net relatively amount on years. development prior accident small can reserve a You unfavorable

representing past, XXXX Rising disclosed Our points fourth ratio mentioned year prior more I and also quarter $XX reserve Similar year ratio levels likely at losses we accident current percentage have rising the representing the unfavorable point to IBNR paid accident for million. in development be IBNR is X.X, paid losses of X.X, X.X and estimate $X million; represents increase adequate, the on of what us reserves a measure. drove XXXX just years. X.X to the full prompted to the

commercial reserves paid of see it. is Rising ratios those believe we in resulted levels what we for influenced related reserve accident main of the for developed casualty our takeaways a are prudent in for and more as years estimate amounts Here some position.

segmentation growth. to XX%. By of quarter aim of an commercial indicates Each Our experienced efforts, or our time. estimated our of healthy another to ratio what underwriting combined approximately estimated ratio segments profitability XXXX over intensifying an and be so, with casualty expense expense premium insurance XX combined improve we of full loss XX.X% loss and we year consider points of ratio year

increases with with both commercial high for year commercial third the ratio XX.X%. our combined was similar commercial XXXX, to remaining quarter, the of line’s lines single-digit net fourth full were the X% segment, For and auto Overall, quarter average year the growth premium in written range. price full estimated

of personal points X%. from commercial the third our increases personal year growth rate increases a segment, were catastrophe net for that with X.X personal lines than similar of combined for quarter points For X% lines the ago. full premium contributed remaining full quarter range. year average X.X XXXX higher written percentage retention XXXX fourth slightly lines to personal to Estimated Policy growth year premium rose of in auto effects. average The high rates with XXXX, total were single-digit in and rate ratio

XXXX our mid-XX% continued of averaged policy retention personal approximately And For end range. commercial the near it high the lines, for XX%. lines,

excess again ratio full XX%. quarter slightly both growth and segment for net the premiums over XXXX a double-digit Our full results, surplus and with written reported and combined fourth year excellent of year and lines

insurance XX% fourth XXXX, where Cincinnati insurance earned a in quarter the smoother profitability catastrophe returned fourth Re quarter profitability combined XXXX nice It XX%. the to this time. substantial continues income, Our Cincinnati we the suffered over a results fourth from overall strong from business ratio, contribution benefit net subsidiary Re following also quarter for portion of of quarter of made a premiums With to by to as extreme tax life diversify grew and expected loss life overall our made weather. contribution effects including earnings. and helps reform grow our to

XXXX. let and significance of a effective tax tax rate for highlight items the applicable I’ll Cincinnati assumptions to Regarding Financial, Mike address reform few

of gains deferred large investing quarter net of income and to of revaluation and investment common of from benefit that the earnings a the some stem capital our tax-efficient a embedded value. in compounding the book approach, highlighting way liabilities earlier, noted our unrealized of appreciation boost equity benefits As of portfolio, the Much stock tax potential fourth provided amount over long-term.

significant anticipate over restructuring bonds. in the into allocate not run, believe do do taxable we money we likely portfolio we While tax-exempt new more short will

stocks growth, shareholder will can grow helps in will U.S. greater remain which to opportunities premium the turn Our to common for in Also creation. that allocation reform profitable extent unchanged. tax economy create result the value

reserve development will Sewell, Financial and comment performance key our areas on Chief results, investor financial results our other Next, financial investment Mike and – Officer, condition. of

Mike Sewell

rising and Steve, of for was Great. X% income quarter year, us was growth, year our quarter quarter up the and joining income XXth quarter today. full X% for X% for of of basis. interest Thank the Fourth you thanks for and all both Dividend X% periods. on a consecutive those income you, both was up and to investment XXXX

income called Our Taxable points that than X.XX% we equity basis year a the for year up total flow was net years lower provide reported or fourth while from during a X.X at on Tax-exempt X% bond points quarters. $X basis operating XXXX. investment continue that yield XX% we’ve million was estimated XX down purchased fourth XX portfolio. year’s had X.XX%, billion. an last quarter effect $XX bonds pretax amounts disclosed from and income to decline to experienced XXXX portfolio’s or quarter. purchased reflect more loss expenses activities again to year investment the The yield million $X.X Funds remained In an of generated increase up duration in cash investment mature. $XXX XXXX, the than funds averaged bond XX%, A matches bonds decrease. tax XXXX the release, down continued than to for Cash mix losses basis effective this in from higher operating key the our of for we XXXX. the effective be ago, portfolio full portfolio’s average ago. of yielding news recent contributor to more year quarter from yield assuming our pretax portfolio’s a X.XX%, paid catastrophe XX rise, flows totaled points bonds to That and for approximately continues continue earnings billion, pretax basis from of average unrealized gains rate

For estimate income, XX% for other book over appropriate that XXXX. Recognizing could is tax and rate approximately believe tax we that all to change. time permanent effective estimated the percentage differences of cause vary amounts

expenses in We investing time continue carefully while business. manage at our same to the strategically

XXXX up rose XXXX. underwriting slightly, year percentage expense point full in ratios Our property from casualty X.X

loss Moving to on reserves.

spread years, quarter accident favorable the businesses reserves reserve XX% be accident consistent years benefit X.X the for year X% for casualty combined of prior to overall on prior than setting basis full full again property percentage reserve year XXXX XX% percentage several and three in Our development point resulted including XXXX. the total, year XXXX XX% accident Favorable our a and over year XXXX, development lines on points, prior years. year of accident our over accident one major XXXX and for In continued average years. of to by lower most accident favorable XXXX, for ratio and net for both approach development

Regarding and capital stable. our strength approach remain management, financial

holding year-end that company from to ago. continue and rose marketable have securities a year excellent cash financial including We flexibility, XX%

To by beginning was approximately February XX% Board bit the shares. financial authorization total action total million represents outstanding increased recent a shares at announced repurchase just XX the at add over flexibility by previously, expanding repurchase Directors, the perspective, of million our Our of which of shares. by of share we authorization XX

an at the total $XX.XX. we share a average quarter, shares During fourth per of XXX,XXX repurchased of price

primary we Another liquidity property our of catastrophe casualty of is again aspect X rare periods unusually in of all part our individual renewed either claims. to this transfer providing year, capital loss events extreme of of management from treaties On or January large reinsurers. risk activity that

net unrealized for value gains share. per-risk Investment we $XX.XX book per a creation gains rose fixed reform of contributed on And share fourth portfolio, of income of underwriting summarize value and to treaty, to a similar The insurance book reduced a income December effect They treaties value and by value by special income, $X.XX. conclude, And tax property represent value property XXXX. $X our treaty. now in decreased gains ratio. dividend. change $X.XX record book Revaluation catastrophe per the life call $X.XX. $X.XX per-risk the deferred fourth drivers losses, increased Property was of Rates for increase net The Steve. $X.XX. book our Life over per to from our value range quarter tax net percentage non-insurance I’ll by main the by of for our the per terms treaties share. increased equity unrealized by at and a $X.XX. to net for conditions basis gains catastrophe – the as of are book share for back book added share during realized tax likewise To low insurance XX than in items, which value increased to operations $X.XX. realized the other declared change a and both per included in the quarter liability portfolio, turn the at XXXX December For XX income casualty in modestly The losses, result single-digit shareholders, and I’ll $X.XX. contributions dividends

Steve Johnston

Mike. Thanks,

I by for the of to strong our also increases We positive. financial outlook underwriting with and years, associates, achieved XXth A+ a with operating to and lies our a XX many consistent agents and outstanding clients, with raising who rating strength As during and of to Xth opening dividend with stage week, many forward respond Last said already on this to in We accomplished our positives. with agents record affirming and our to executing again a A.M. year strength profit. set our deepening upward to a ended deliver strategies growth my for year. recognized XXXX in trends our the row long-term capital continue your we rating questions remarks, appreciate and Best annual and of in credit have year. our outlook issuer stable meeting success. relationships extended We remainder person our opportunity their you the to look The results of key service to our our

Stecher, questions. As Mike Theresa me the Scherer, and Hollenbeck Hoffer. a Marty Marty J.F. today with are for please call Ken reminder, and open Jamie, Mullen,

Operator

the [Operator Instructions] with from line comes Your Soleimani of question first KBW. Arash

Your line is open.

Anthony To

my questions. is this Arash. for Hi, taking good morning, Anthony in you Thank for

Steve Johnston

Good morning.

Anthony To

going to on loss trends. I about what’s provide casualty can color to in wondering wanted there you on touch if and commercial more was respect

the that Specifically, seeing you mentioned elevated of much I increase? drove How disparity. think

J.F. Scherer

seeing is we’re some this Scherer. J.F. Anthony, severity. Yes,

our we it. a of of the think opportunity in mentioned casualty think, of keep up We not cars frequency severity underwriting underpriced a we inexperienced improvement casualty rate business. our but Some has seeing, controlling really in – working only Steve remarks, economy industry, driving up, But we Despite over in most are the increases of drivers business. the good as entire business there entire across that book signs book we’re in can with our commercial frequency. our the his of is is our of and construction and heating think book of are off lot part in despite fact there for that the paid increase

Anthony To

we I day? commercial follow Okay, call casualty a possibly run take guess why up as think thanks. XX% now I previously And on to and And Should run anticipate a new charge in suitable the larger that, we rate? not XX.X% being it about also, a spoke rate.

Steve Johnston

I’m heard run not sure, rates. Anthony, I those

a we to the have that feel estimate do to that be we feel our when do at to book best have we a consistent we what and think estimate. we good reserve, time, approach best we the I a book

to back been to and that seen it’s still address going think we’ve I kind trends, I at profitable. we’ve when and to able think also, – of the comments, set rising we’re extent the my it time

at strategy, we businesses, of we package, Now when ratio sell directions. that that we expected There a them there, trends moving package Within that to see, that have different feel profitability have booked strategy. basis. look under and the Within address the we And add we that an XXX%. are in our of position in I think in of rising of expense agency And a in the we’re confident of have these accounts importantly, our a different in lot still those, we parts individually. lines coverages we’re of casualty And policy most consider feel there. line. we’ve we reserves, all moving an every on we some we confidence continuation

Anthony To

Okay. of kind And X.XX% is suitable new rate? run the

Steve Johnston

that combined rate. sure We think for can come provide overall, with in a everything, not a in we feeling at ratio run XXs. the we and look I where mid we to low gave I’m a think we

Anthony To

that’ll rates the loss are your talk similarly, ratio was if wondering And I thinking the in bit of terms I can Worker’s a going about specifically, you’re about And and thoughts impact then how actions you regular elevated of state how guess little Comp. pace core forward? on what and

J.F. Scherer

our rates. the your been for the and for NCCI industry. and and monitor That the cost us has we headwind industry, the is for use a for action, regulatory think I state about reducing factors loss Yes, that those point

a market a would in we’ve lot some Comp area, fairly be seen a of overheated what aggressive the addition that is are view pretty – that, commission approaches Worker’s In to companies taking. I to

talked the as of. we’re we’ve in past, writer So about very conservative a

loss I new there. NCCI can – decreases we maintain to our best book been to has paying business, put that penalty whatever business writing through we’ve allowed rates and We cost of there. trying new have not business comp, go to business we’re new new through relative those not a has say business, so will completely in our we’re writings,

In priced. adequately fact, more it’s been than

we’re that business year think I rates, and to comp we’re to going – we’ll of this work how with book anticipating So result. will come conservatively as a approach lower manage NCCI continue our out

Anthony To

you. thank Okay,

Lastly, guess What was for than And items. provide update I guess, loss current you then the housekeeping progress the I net XX worth? an worth previously some personal the you business of mentioned? in-force premiums ratio also, better high on, non-high net lines can points the that

J.F. Scherer

Sure.

open million in for we’ve high in book time I to And where would long be agencies active Where exception high the business of terms have our seen in time. more what of now. for in we net a states book particularly We’re the in high with have new in net very losses lines of and the worth a of is in net are very worth, active high worth, very personal where long at been $XXX we’re our we that business. and large net elevated considered of we’ve high some net What been sell business worth, claim, performing of areas we’ve business, our affluent book results the worth one well. states mass of part

high book But re-underwrite net quality York; the had very very underwrite our to Jersey; we’re with open and states And we and quality statement, now net particular, have worth, time. of period of in results so on of and California. a business business getting we’re for pleased well. some general book business pleased we’re we’re New we high Massachusetts for getting in in the as as the that worth; results of the getting is with downstate there we’re And New continuing like

Anthony To

back the I for Okay, queue. to return the thank you answers. will

J.F. Scherer

you. Thank

Operator

with comes Shanker from Bank. Josh Deutsche Your next question

Your line is open.

Josh Shanker

Yes, good everyone. morning,

Steve Johnston

Good morning, Josh.

Josh Shanker

Good morning.

on long-term impacting hear what you taxes where Just think areas wanted like. compete the trajectory and thoughts your looks guys pricing the in you to in

Steve Johnston

the Steve. And tax has is reform This good. taxes, been very think I the

it’s I look most when beneficial been fairness. at think we

really it’s think playing the I field. leveled

just of I perfect pricing cost. the think and comes in demand. it taxes – elastic of down we to terms as forward, would world, in another flow through perfectly The a supply as elasticity go

middle it pricing will think of where a somewhere period there. I I terms over be pass otherwise a pricing. emphasize insurance it to would think rather current the probably be pricing level. relative industry do certainly the is portion than But I But of the of would time, through in in would

positive But will P&C rate. because there the all some cost time think to benefits that elasticity thing trends, tax is this do are reform on in the a loss good we’re that. it I middle-class the and And rates We’re in where think area industry, over will Americans. taking pass there of I it’s reflect

product. to think And is I good think insurance – savings it’s the extent that to some the beneficial in to thing. middle-class the quintessential is reform on our passing consumers, the tax a I

Josh Shanker

you’re saying same even clarify, are ROE on the underwriting just the will margins the different? if business be to So the

Steve Johnston

I do play a on supply very come out, that. it’s but It’s elasticity a just and this of and think how that to I have to I think of lot going into competitive would directly, comment we’ll to that variables see down didn’t other there’s industry. plays demand.

strategy cost for very get taxes will United on from, in commercials, is in in going it business of our which be people be – if for premiums stimulation there and we our look tax it to is feel at investing, to go that’s I impact The it our commercials I the total optimistic of on going States return good I how industry. in also reform would a out good. compete there, terms competitive wasn’t where even down. indicative we the are competitive the only most that’s be television of that’s about us. wonder on but terms on of extent insurance if tax position. just directly of us environment, rates business cost-based not television the on As impact of costs a a to And think And of And

positive income the to effect results. also Our a is investment have and going on underwriting

So we’re to how in going I competitive see environment. out this a think just plays

Josh Shanker

luck and you thank Well, it. Okay. with good

Steve Johnston

Thank Josh. you,

Operator

Markets. comes [Operator of Instructions] Your from next the Heleniak Capital question Scott line RBC with

open. Your is line

Scott Heleniak

thanks. Hi, good morning,

Steve Johnston

Scott. morning, Good

Scott Heleniak

Yes.

was I – The about about have the first this generally just help most companies an just starting have question quarter to talked line. economy top improving

think I what I referenced ago. has able benefit might now wonder to that that if this few And versus you you’re quarters bit. a little just was maybe incremental be benefit quantify it a been, you better whether quarter seeing and a what

Steve Johnston

will Scott, the accelerating it’s – an quickly I had. been tax we’ve I even rate I stimulating given will that – and reform And of importantly changing enough. it’s it agree at more beneficial continue be to think it would probably the I believe it’s think that beneficial. effect be

J.F. Scherer

that Scott, also we this of to, is part an is is J.F. what I from carefully might made underwriting add – are I to watching this that reference standpoint. is and

the that a noticed driver be younger, are economy and to outside significant We’ve shortage an they drivers. of same we’ve about inexperienced in of general Consequently, commercial it we workers other workers And that any policyholders aggressively that. with discussions let’s present contractor fairly There’s workers would a inexperienced that One exposure, there’s the underwrite in of that the context shortage. talked that things certain we’re recognizing would to we so drivers. the and is and be in also or improving construction say, make for and have their work agents comp identifying out more to reflect work there. labor underwriting closely more true additional closely involving, with

Scott Heleniak

of have would trends. sense. to makes that Yes, those Okay. kind expect Definitely see

those too little severity. a The was about the bit lines had other was question I – along

commercial as – mentioned You auto well. commercial and the commercial assuming I’m casualty, auto

that in pretty is the rise that seeing the stable? those are places much Is of the – where severity? only rest you’re So book

Steve Johnston

the cost for lines predictable most in focus more when of loss combination and terms pricing, think it’s we frequency trend, in I which with on is of the severity, think our two. I changes the

But across And to the result pace so frequency get just I break cost trends. from that the at maybe with we look our stable a trend. than priced long-term as overall think trends most it all the a Comp keep that’s or will we’re profitable in between out a an showing of we seeing. down – combination severity. what try we loss at And the from lines. to at our and seen I’ve exception, And we’re we when Worker’s we’re they’re position level loss more trend the of loss least adequately very but cost models, cost think given

as as year least we We’re at adequately a priced were ago.

Scott Heleniak

quarter? Okay. And non-cat there any fourth last year-over-year, was there unusual non-cat that Was year-over-year? claims claims property versus year’s did look change in how –

Steve Johnston

jumped off page think that, up I a tame. that it remember the fourth I don’t that the at me. would be for quarter, fairly was metric Mike is looking the numbers, but

Mike Sewell

Steve. right, This is you’re Yes, Mike.

our five-year of X.X points, was losses XXXX, end For quarter, the is average the five-year right average was XXXX, the and at points. weather X.X or fourth the end that the of about on non-cat which

were of we on top right it. So

Scott Heleniak

reinsurance. I know And about final have had guess, talked about is now but we, the of a better a this picture ago, couple you renewals. January of the – looks Okay. what question X just And months just we like, I and market my environment

big continue year, $XXX update you’re as could in premium, at wondering XXXX that obviously to that got Is there over looking opportunity business you well? up scale on that really how a and you on some million to in reasonable us traction amount business. by So last if just nice

Steve Johnston

Yes, great question.

XX new last X/X, had the conservative on I coming I the in very at property prudent manner way that think with that commented X/X feel we are what at is cat focus accounts profitability. If I it going in pricing. same of discipline and book, The opportunities and only quarter. the a our we at I declined added about to in about terms renewals. three we through did look due we X/X it

of from two of contracts would But area either we’re of rate shares, what the be some reinsuring. growth came those. would clients, growth the Another existing some got we of call we growth we clients where had expanding new we had that underlying existing combination companies on preponderance where the improvement, and

with we’re growing. strategy. the It’s way consistent, we I’m happy So up drew that the the very much way

that to the the line on the so want executing focus than We’re the line. more plan the grow bottom idea top with we

Scott Heleniak

Thanks. Okay.

Steve Johnston

you. Thank

Operator

There the questions time. at any this over no turn back Mr. Johnston closing further will are to remarks. for I call

Steve Johnston

We first Okay. have for just on you It’s again today. you to great thank quarter Thank our and us XXXX look you. you, call. Thank Jamie. joining forward everybody, speaking with to

Operator

today’s This conference call. concludes

You may now disconnect.

Cincinnati Financial (CINF) 8 Feb 182017 Q4 Earnings call transcript