Cincinnati Financial Q4 2024 Earnings Call Transcript

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Provided by AlphaStreet
February 11, 2025
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Operator

Good morning, and welcome to the Cincinnati Financial 4th-Quarter and Full-Year 2024 Earnings Conference Call.

All participants will be in listen-only mode. Should you need assistance, please signal a 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 on your telephone keypad. 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.

Dennis McDaniel
Investor Relations Officer at Cincinnati Financial

Hello, this is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our 4th-quarter and full-year 2024 earnings 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,. The shortest route to the information is the Quarterly Results section near the middle of the Investor Overview page.

On this call, you'll first hear from President and Chief Executive Officer, Steve Spray; 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 Executive Chairman, Steve Johnston; Chief Investment Officer, Steve Soloria; and Cincinnati Insurance's Chief Claims Officer, Mark Schambow; Senior Vice-President of Corporate Finance, Theresa Hoffer.

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.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Good morning, and thank you for joining us today to hear more about our results.

Our hearts go out to those impacted by the LA wildfires. You've lost homes, treasured belongings, a sense of community, and in the most devastating cases, loved ones. I also want to thank the first responders who put their lives on the line, our agents for their support and partnership, and of course, our claims associates who are working tirelessly to help our policyholders with immediate needs and longer-term plans.

Before I share more details about our current estimate for this catastrophe, let's dive into how we performed last year. Operating performance for the 4th-quarter was very strong and many key areas showed improvements. We are also pleased with performance for full-year 2024, thanks to the superb work of our associates providing service to agents who we consider to be the best-in the insurance business. Our 4th-quarter results compared to the same-period last year included a better combined ratio and excellent growth in premiums and investment income. The result boosted net income and we had double-digit growth in operating income.

Net income was $405 million for the 4th-quarter of 2024. It included recognition of $107 million on an after-tax basis for the decrease in fair-value of equity securities still held. An unfavorable swing of $931 million from the same-period a year-ago. Net income for the year rose 24%. Non-GAAP operating income for the quarter increased 38% to $497 million and rose 26% for full-year 2024. Our 84.7% 4th-quarter 2024 property-casualty combined ratio was 2.8 percentage points better than a year-ago. It brought the full-year combined ratio to an outstanding 93.4%, 1.5 points better than 2023. The full-year improvement included a catastrophe loss ratio effect only 0.2 points lower.

Our 86.5% accident year 2024 combined ratio before catastrophe losses improved by 1.9 percentage points compared with accident year 2023, including 5 points of improvement for the 4th-quarter. First, we reported another quarter of strong premium growth. We believe it's profitable growth as our underwriters diligently use pricing precision tools to support their risk segmentation efforts on a policy-by-policy basis. For example, estimated average renewal price increases for the 4th-quarter were similar to the 3rd-quarter of 2024. Commercial lines moved slightly lower in the high single-digit percentage range and excess and surplus lines remained in the high single-digit range.

Our Personal Lines segment was also similar to the 3rd-quarter with personal auto in the low double-digit range and homeowner in the high single-digit range. New business growth produced by agencies representing Cincinnati Insurance continued at a nice pace. Nearly one-third of the growth for the year was from agencies appointed since the beginning of 2023, reflecting our strategy of appointing additional agencies where we identify appropriate expansion opportunities. Policy retention rates in 2024 were similar to last year with our Commercial Lines segment up slightly, but still in the upper 80% range. Our Personal Lines segment remained in a similar position of the low-to mid 90% range.

The overall result was consolidated property Casualty net written premiums growth are growing 17% for the quarter, including 15% growth in agency renewal premiums and 23% in new business premiums.

Next is a brief review of performance by insurance segment for full-year 2024 compared with 2023. Most -- most metrics also improved on a 4th-quarter basis. Commercial lines grew net written premiums 8% with an excellent combined ratio that improved by 3 percentage points to 93.2%. Personal Lines grew net written premiums 30% and improved the combined ratio by 2.9 percentage points to 97.5%. Access and surplus lines grew net written premiums 15% with a 94.0% combined ratio. Although that was 3.4 percentage points higher than last year, it's still quite profitable. Both Cincinnati Re and Cincinnati Global were also very profitable.

Cincinnati re grew net written premium 7% with an 85.0% combined ratio, while Cincinnati Global's growth was 8% with a 73.6% combined ratio. Our life insurance subsidiary also improved its results with a 21% increase in 2024 net income and term life insurance earned premium growth of 3%. These strong results combined to bring our value-creation ratio in above our target of 10% to 13% on a five-year average basis. Our 4th-quarter DCR was 1.8% and we reached 19.8% on a full-year basis. Net income before investment gains or losses for the year contributed 9.9%, higher overall valuation of our investment portfolio and other items contributed the other half.

Before I turn the call over to Mike, I'll provide our current estimates of financial effects related to the recent California wildfires and an update on our 2025 reinsurance program.

We estimate first-quarter 2025 pre-tax catastrophe losses of approximately $450 million to $525 million, net of reinsurance recoveries. That includes approximately 73% for our Personal Lines Insurance segment, 24% for Cincinnati Re, and 3% for Cincinnati Global. We reinstated the applicable layers of our primary property catastrophe reinsurance treaty coverage and will cede additional premiums to our reinsurers. Cincinnati Re will receive additional premiums from treaties reinstated. The estimated net effect of first-quarter premium revenue is a decrease of $50 million to $60 million.

To keep this event in perspective, had the wildfire effect occurred in 2024, we believe we would still have earned a modest underwriting profit. On January 1 of this year, we again renewed each of our primary property-casualty treaties that transfer part of our risk to reinsurers. For our per-risk treaties, we increased our retention for the property treaty to $15 million while retention for the casualty treaty remained at $10 million.

Other terms and conditions for 2025 are fairly similar to 2024. The primary objective for our property catastrophe treaty is to protect our balance sheet. The treaty's main change this year is adding another $300 million of coverage, increasing the top of the program from $1.2 billion to $1.5 billion. We again retain all of the first $200 million, then retain 56% of the next $100 million, 25% of the next $100 million and approximately 14% of the next $1.1 billion.

Now let me turn the call over to Chief Financial Officer, Mike Sewell, for additional highlights of our financial performance.

Michael J. Sewell
Chief Financial Officer, Executive Vice President and Treasurer at Cincinnati Financial

Thank you, Steve, and thanks to all of you for joining us today. Investment income reached $1 billion for the year and significantly contributed to our improved operating performance. It grew 17% for the 4th-quarter and 15% for the full-year 2024 compared with the same periods of last year. Dividend income was down 4% in the 4th-quarter, driven by 3rd-quarter sales of equity securities from previously disclosed rebalancing of our investment portfolio. Bond interest income grew 28% for the 4th-quarter of this year.

Net purchases of fixed maturities -- securities totaled $1.1 billion for the quarter and $2.5 billion for the year. The 4th-quarter pre-tax average yield of 4.93% for the fixed maturity portfolio was up 45 basis-points compared with last year. The average pre-tax yield for the total of purchased taxable and tax-exempt bonds during 2024 was 5.66%. Valuation changes in aggregate for the 4th-quarter were unfavorable for both our equity portfolio and our bond portfolio. Before-tax effects, the net loss was $136 million for the equity portfolio and $350 million for the bond portfolio.

At the end-of-the 4th-quarter, the total investment portfolio net appreciated value was approximately $6.7 billion. The equity portfolio was in a net gain position of $7.2 billion, while the fixed maturity portfolio was in a net loss position of $553 million. Cash-flow, in addition to higher bond yields, continued to benefit investment income growth. Cash-flow from operating activities for full-year 2024 was $2.6 billion, up 29% from last year. Regarding expense management, our objective is to balance spending control efforts with investing strategically in our business. Our 29.9% full-year 2024 property-casualty underwriting expense ratio was in-line with 2023 in total and for each major expense category. The 4th-quarter ratio was 1.4 percentage points lower than last year, primarily due to lower accruals for agency profit-sharing commissions in addition to premium growth outpacing the increase in employee-related expenses.

My next topic is loss reserves, where our approach remains consistent and aims for the net amounts in the upper half of the actuarily 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. Then we updated estimated ultimate losses and loss expenses by accident year and line-of-business. During 2024, our net addition to property-casualty loss and loss expense reserves was $1.1 billion, including $998 million for the IBNR portion.

We experienced $236 million of property-casualty net favorable reserve development on prior accident years that benefited the combined ratio by 2.7 percentage points during 2024. For our commercial casualty line-of-business, there was no material reserve development for any prior accident year during the 4th-quarter. On an all-lines basis by accident year, net reserve development during 2024 included a favorable $369 million for '23, favorable $63 million for '22, favorable $5 million for '21 and an unfavorable $201 million in aggregate for accident years prior to '21.

My final comments highlight our capital management activities. For full-year 2024, we return capital to shareholders through $490 million of dividends paid-in addition to share repurchases. Shares repurchased totaled 1.1 million shares at an average price of approximately $113 per share, including an immaterial amount during the 4th-quarter. We believe our financial flexibility and our financial strength are both in excellent position.

Parent company cash and marketable securities at year end totaled $5.2 billion. Debt-to-total capital remained under 10% and our quarter-end book-value was at a record-high $89.11 per share, with nearly $14 billion of GAAP consolidated shareholders' equity providing plenty of capacity for profitable growth for all of our insurance operations.

Now, I'll turn the call-back over to Steve.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Thanks, Mike. 2025 marks the 75th anniversary of the Cincinnati Insurance Company. Over that time, we've come to understand the importance of stability, consistency and financial strength. We understand that we are in the business of accepting risk. We plan for it, we price for it. We spend considerable time and effort focused on appropriately balancing growth and profitability through geographic and product diversification, pricing sophistication and enterprise risk management.

No one expects to experience a catastrophic loss such as those felt by the people who found themselves in the paths of Hurricanes Hellen and Milton or the California wildfires. However, it's in the aftermath of these events that Cincinnati Insurance can shined. Confident in our financial strength, our claims associates can focus on delivering fast, fair and empathetic service. At the same time, we are ready to build value for shareholders. The Board recently reinforced their confidence in our strategy by declaring a 7% dividend increase payable in April and paving the way to extend our streak of increasing dividends to 65 years.

As a reminder, with Mike and me today are Steve Johnston, Steve Soloria, Mark Schambow and Theresa Hoffer.

Gary, please open the call for questions.

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Operator

We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick-up your handset before pressing the keys. To withdraw your question, please press star then to. At this time, we will pause momentarily to assemble our roster.

Our first question today comes from Michael Phillips with Oppenheimer. Please go-ahead.

Michael Phillips
Analyst at Oppenheimer

Thank you. Good morning, everybody. I just want to start-off, I guess, Steve, love to hear your perspective on higher-level question on the outlook for the reinsurance sector in the aftermath of California. I guess, how do you see capacity as the year progresses? How do you expect Re to respond? And then maybe how should that translate into kind of premium for 2025 for that segment? Thanks.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Yeah, Mike, are you talking specifically on Cincinnati REI or ceded?

Michael Phillips
Analyst at Oppenheimer

Well, I think first of all, just your thoughts. Yeah, just your thoughts on the market in general broadly for the industry, how it responds? And then kind of drill down to how you guys -- it looks some opportunities, how you guys would respond and what does that mean for Cincinating rate?

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Yeah. Maybe I'll start with just the reinsurance market to your question, Mike, first is sort of I think the reinsurers appropriately the last couple of years, I think have -- have shown just the industry itself has shown an underwriting profit. I think that's good, that's healthy. We all need that. I'll speak specifically for Cincinnati Insurance. We've just got such long-term relationships and partnerships with our ceded partners, our reinsurers and talk to them on a regular basis, obviously. You know, we expect to pay all of our losses ground-up plus the reinsurers margin over-time. We need them healthy. They know that. We've traded with them that way over-time and that won't change. So that would probably be my remarks there.

Cincinnati REI, they're going to stay the course. You heard we had an extremely profitable 2024 inception-to-date with Cincinnati Re has -- is very profitable as well. They plan for CAT, that's what they do. You know, their losses on specifically on the Californian wildfires were within expectation and they'll proceed throughout the year with their 2025 plan. No change.

Michael Phillips
Analyst at Oppenheimer

Okay. Thanks, Steve. Next question is, I ask -- I wouldn't classify your umbrella exposure in general for your company as tiny, but it's certainly not outsized. But a question related to sort of umbrella. And in personal lines, I think this quarter, I didn't see a lot -- for personal lines umbrella. I didn't see a lot of change in claim count activity in that two to five layer. But dollar amounts did move-up. So something is there, 10 plus $25 million, $35 million of loss in that $2 to 5 layer. Any color you can add-on anything in a quarter specifically that would help justify that extra amount of dollars in that layer and more broadly after the quarter, anything you're seeing in umbrella excess layers that would cause any concerns? Thank you.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Thanks, Mike. I appreciate the question. Now looking at a quarter for umbrella, whether it be commercial or personal, I think it's going to -- it's going to kind of mislead you a little bit. I think you got to pull-back to more of an annual number. There's just the frequency with umbrella is obviously very low. It's a severity line. There's inherent volatility in it. So we look at every single large loss we have in every single-line of business we have and look for trends, whether it be by state, by agency, by class of business. That's -- obviously, I'm speaking to commercial. We do the same thing for personal lines as well. So we don't see anything in that commercial book -- or excuse me, in that personal lines umbrella book that causes us any concern.

Michael Phillips
Analyst at Oppenheimer

Okay. Thank you and congrats on the quarter. Appreciate it.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Yeah. Thanks so much, Mike. Appreciate it.

Operator

The next question is from Gregory Peters with Raymond James. Please go-ahead.

Gregory Peters
Analyst at Raymond James

Good morning. I want to go back to the comments on the fire loss. Could you provide some perspective on -- you -- I think you said $50 million to $60 million of reinstatement costs, what the gross loss might be or what you're pegging for using for your gross loss number and just trying to figure out how far up the tower you went.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Yeah. Thanks, Greg. And as you can imagine, this is an active, still an active cat. And for right now, our range -- our net range that we're providing you is our best estimate of ultimate loss and we're going to just stick with that net range of the 450 million to 525. Just not -- not there -- so many moving parts right now, Greg, just providing a gross number is ready to go.

Gregory Peters
Analyst at Raymond James

Can maybe pivot away from that then? And just, you know I know there was a call recently with the insurance regulator and the governor and a bunch of insurance companies and it feels like there's some movement to making -- allowing more rate activity in homeowners to compensate for the fire risk. Can you -- can you talk about what your perspective is of that market looking-forward once we get through paying all the losses, et-cetera.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Yeah, sure. One thing I'd point out for the Cincinnati book is 77% of our homeowner premiums in California today are on a non-admitted basis. On the admitted side, I don't -- I think it's pretty well-documented. I don't think it's any secret that California is a challenging market. We've got great agents and policyholders and we want to support them. As you can imagine also, after you know, I just mentioned any individual single large loss and also after any CAT event, we do a deep-dive as a company and objectively look at everything regardless of the event and determine if there's lessons learned, there's always lessons learned. There's anything we need to do in changing our strategy moving forward if anything. We'll obviously do that here with California and with the wildfires.

And there's just a lot of -- as you can imagine, Greg, there's a lot of moving parts with this as well. And yeah, the regulation, rate environment, things of that nature, there's a long list of things that we will look at, you know, but I think right now we are really focused on paying claims fairly empathetically face-to-face and the lessons learned, although we are looking at them actively, you know that will take a little longer to really formulate if we're going to make any changes going-forward.

Gregory Peters
Analyst at Raymond James

Okay. I'll pivot away from that line of question. Just my question broader -- broadly speaking is, you know there's -- in the commercial lines market, maybe in the personal lines market ex-California, just this growing sense that the pricing cycles kind of peaked, maybe it's moderating, price increases aren't as robust in some instances are going down. But can you can you remind us and just give us a snapshot of where you were at the end-of-the year? And I know part of your book has multi-year policies. Can you give us a snapshot of where those policies reside and what the percentage of the total was?

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Yeah, sure. So you know, as we -- as we just talked about, on the -- for the major lines of business, commercial property, general liability and auto, we're in the high single-digit range. Work comp is down in the mid-single digit range. That's been that's pretty been pretty well-documented. So we're still seeing rate into that commercial lines book. But I think the point estimate or the average, Greg, just doesn't -- it doesn't tell the story for us. Our underwriters at the desk level working with agents, using the precision -- the pricing tools that they have are segmenting our book.

So there's a large percentage of our book of business. And as you know, we're a package underwriter that just as an example, may get a flat increase and there's a percentage of our book, albeit smaller, may get 20% or 30%. Point being is that we are segmenting, we're underwriting and pricing policy by policy risk-by-risk. So we're still seeing rate come into the book. The rate from last year, 18 months ago is still earning into the book. So I suspect here throughout 2025, you'll still see rate coming into that commercial lines book.

Gregory Peters
Analyst at Raymond James

Thank you for your answers.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Sure. Thank you, Greg.

Operator

The next question is from Dean Criscitiello with KBW. Please go-ahead.

Dean Criscitiello
Analyst at KBW

I wanted to start and sort of dive deeper into the reserve strengthening both in the commercial auto and the excess and surplus line segment. I was just sort of curious like if there's anything else you could provide on sort of the accident years that the strengthening came from and what sort of trends you're seeing in those lines?

Michael J. Sewell
Chief Financial Officer, Executive Vice President and Treasurer at Cincinnati Financial

Yeah. Thanks for the question, Dean. This is Mike Sewell. So yeah, you're keying in on a couple of points there. So on the personal auto, you know, it's really I think our case incurred for some of the liability coverages that are in there were showing an upward trend and I would say that those were mostly for the 2023 and the 2022 accident years mostly. So that's where you saw a little bit of reserve strengthening there.

And then as it relates to the surplus lines, our case incurreds are there, they were just -- they were -- they were just materializing greater than what we had expected. E&S is about 90% casualty, at least of our book. So it's really kind of similar to the industry averages that we're seeing with inflation, et-cetera. So more prudent reserving was there. And as I indicated, we added $998 million of IBNR. So for the overall book, about a third of that went to commercial casualty. So just prudent reserving, watching what we're doing and being -- being consistent with our process. So thanks for the question.

Dean Criscitiello
Analyst at KBW

Yeah. Got it. That makes sense. And then just quickly on the commercial property like and your ex-cat loss ratio, it seemed abnormally low this quarter. Is there any other color you could provide on and why the profitability was so strong this quarter.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Sure, Dean, this is Steve Spray. Yeah, we'll take it. It -- but what's driving that is was just a drop-in large losses. This drove the absolute lion's share of those commercial property results. But I would be -- you can get -- you can get volatility with those large losses quarter-to-quarter. We've had it where we -- where it's gone the other way. So again, prefer to look at the kind of the full-year. Our teams, I'd be remiss if I didn't talk about commercial lines underwriting teams working with the agents and underwriting that commercial property book, it was -- it was running a bit of a temperature. And so just as we always do, all hands-on deck with risk selection and pricing segmentation got us in a good spot there.

Dean Criscitiello
Analyst at KBW

Got it. Thank you.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Thank you, Dean.

Operator

Again, if you have a question, please press star then 1. The next question is from Michael Zaremski with BMO Capital Markets. Please go-ahead.

Dan
Analyst at BMO Capital Markets

Hi, good morning. It's Dan on for Mike. If I could just go back to adding to commercial casualty IBNR, you're still adding to those levels year-over-year, maybe a little less so in magnitude in 2023. But can you just talk about the loss cost inflation trend that you're seeing now and how that's changed throughout the year? Thanks.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Sure. Mike, Steve Spray again. Yeah. As you know, we don't disclose a specific loss cost increase. But I would say -- maybe I'll answer this a little broader too is we feel we feel that our rates, our premiums, again, this was on a prospective basis, everything we do with ratemaking is prospective that our -- our pricing is exceeding or matching loss costs. And the only one caveat on that would be with the workers' compensation line-of-business.

Dan
Analyst at BMO Capital Markets

Okay, thanks. And then maybe just on the casualty trend. You know, what -- how much of that would you say is a reaction to these contractors industry exposure? I think some peers have talked about this industry as being overly exposed to social inflation.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Yeah, I can't say that we have seen the construction business, at least the business that we write, Mike, being overly exposed to social inflation, you know, a lot of the social inflation we see is under the umbrella off of auto -- commercial auto losses. We do, back to the construction piece, we do watch closely and it really depends on the jurisdiction you're in or the venue in. Construction defects claims can be a challenge from time-to-time, and maybe that's what they're referring to. But for our construction book, which would be small to mid-market particularly, trade contractors and such, with that mix of business, we haven't seen -- I can't say we've seen the social inflation into our construction book.

Dan
Analyst at BMO Capital Markets

Okay, thanks. Then also just on workers' comp, you mentioned that's the only line-of-business where you're seeing a trend above pricing. Just there was an acceleration in reserve leases and comp this year. Are there any thoughts to maybe adjusting that pick going-forward or taking some more of the good news upfront?

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Yeah. Well, that's something that we talk regularly here with the actuarial team and they're taking a look at it all-the-time. So I don't have anything to report on that, Mike. Obviously, you know, I've been talking about the deterioration of work comp pricing for I don't know-how long now in calendar year-wise, the results continue to be favorable. So we'll take it. But your point is also well taken as far as just understanding and maybe taking a different view of it. We'll leave that in the hands or in discussions with the actuaries.

Dan
Analyst at BMO Capital Markets

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Steve Spray for any closing remarks.

Stephen M. Spray
President and Chief Executive Officer at Cincinnati Financial

Thank you, Gary, and thank you all for joining us today. We look-forward to speaking with you again on our first-quarter 2025 call.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Corporate Executives
  • Dennis McDaniel
    Investor Relations Officer
  • Stephen M. Spray
    President and Chief Executive Officer
  • Michael J. Sewell
    Chief Financial Officer, Executive Vice President and Treasurer
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