Title

Presentation

Operator: Good morning, and welcome to the Cincinnati Financial Corporation Fourth 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 one on your telephone keypad. 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 of Cincinnati Financial Corporation.

Dennis McDaniel: Thank you for joining us for our fourth 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 investors.cinfin.com. The shortest route to the information is the quarterly results section near the middle of the investor overview page. On this call, you will 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 Shambo, Senior Vice President of Corporate Finance, Teresa Hopper.

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 will turn over the call to Steve.

Steve Spray: 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 have 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 fourth 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 fourth 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 fourth 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% fourth 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% 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 fourth quarter. 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. Estimated average renewal price increases for the fourth quarter were similar to the third 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 line segment was also similar to the third 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 line segment up slightly, but still in the upper 80% range.

Our personal line segment remained in a similar position of the low to mid-90% range. The overall result was consolidated property casualty net written premiums 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 metrics also improved on a fourth-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%. Excess 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 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 result 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 fourth quarter VCR was 1.8%, and we reached 19.8% on a full-year basis. Net income before investment gains or losses for the year contributed to a higher overall valuation of our investment portfolio. 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 pretax catastrophe losses of approximately $450 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 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 1st of this year, we again renewed our primary property casualty treaties that transfer part of our risk to reinsurers.

For our per risk treaties, we retained while retention for the casualty treaty remained at $10 million. Other terms and conditions for 2025 are fairly similar to 2024. A 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 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 retained 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.

Mike Sewell: 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 fourth quarter and 15% for the full year 2024 compared with the same periods of last year. Dividend income was down 4% in the fourth quarter driven by third-quarter sales of equity securities from previously disclosed rebalancing of our investment portfolio. Interest income grew 28% for the fourth quarter this year. Net purchases of fixed maturities securities totaled $1.1 billion for the quarter and $2.5 billion for the year. The fourth 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 fourth 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 fourth 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, continue 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 fourth 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 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.

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 fourth quarter. On an all-lines basis by accident year, net reserve development during 2024 included a favorable $369 million for 2023, favorable $63 million for 2022, favorable $5 million for 2021, and an unfavorable $201 million in aggregate for accident years prior to 2021.

My final comments highlight our capital management activities. For full year 2024, we returned 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 fourth quarter. We believe our financial flexibility and our financial strength are both in excellent shape. 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 our insurance operations.

Now I will turn the call back over to Steve.

Steve Spray: Thanks, Mike. 2025 marks the 75th anniversary of the Cincinnati Insurance Company. Over that time, we have 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 Helene or the California wildfires. However, it’s in the aftermath of these events that Cincinnati Insurance can shine.

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 Shambo, and Teresa Hoffer. Gary, please open the call for questions.

Operator: We will now begin the question and answer session. To ask a question, you may press star then one 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 two. Our first question today comes from Michael Phillips with Oppenheimer. Please go ahead.

Michael Phillips: Thank you. Good morning, everybody. Just want to start off, I guess, Steve, love to hear your perspective on a 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 Cincinnati Re to respond and maybe, how should that translate into kind of premium for 2025 for that segment? Thanks.

Steve Spray: Yeah. Mike, are you talking specifically on Cincinnati Re or ceded Re?

Michael Phillips: Well, I guess, first of all, just your thought yeah. Just your thoughts on the market in general, more broadly from the industry, how it responds. And then kind of drill down to how you guys it looks there’s gonna be some opportunities how you guys would respond and what that means for Cincinnati.

Steve Spray: Right. Let me maybe I’ll start with just the reinsurance market to your question, Mike, first. You know, I think the reinsurers, appropriately, the last couple of years, I think, have shown, you know, 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 you know, 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.

That would probably be my remarks there. Cincinnati Re, they’re gonna 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 catastrophe. That’s what they do. Know, their losses on specifically, on the California wildfires were within expectation, and you know, they’ll they’ll proceed throughout the year with their with their 2025 plan. No change.

Michael Phillips: Okay. Alright. Thanks, Steve. Next question is I ask I I wouldn’t classify your umbrella exposure in general for your company as is is tiny, but it’s only not outsized. But question related to sort of umbrella. In in personal lines, I think this quarter, it didn’t see a lot it’s a personal line I didn’t see a lot of change in claim count activity in that two to five layer. But dollar amount did move up. So, you know, some something’s there. Thirty ten plus twenty five, thirty-five on that as well. So the two to five layer. Any call you can add on anything in a quarter specifically that would help justify that that extra amount of dollars in that layer and and and more broadly after the quarter, anything you’re seeing in umbrella excess layers that would cause any concerns. Thank you.

Steve Spray: Yep. Thanks, Mike. Appreciate the question. Now, you know, looking at a quarter for umbrella, whether it be commercial or personal, I think it’s gonna it’s gonna kinda mislead you a little bit. Like, you gotta pull back to more of an annual number. There’s just you know, the frequency with umbrella is is obviously very low. It’s a severity line. 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, you know, 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: Okay. Steve, thank you, and congrats on the call. Appreciate it.

Steve Spray: Yeah. Thanks so much, Mike. Appreciate it.

Operator: Next question is from Gregory Peters with Raymond James. Please go ahead.

Gregory Peters: Good morning. I I wanna go back to the the comments on the fire loss. Could you provide some perspective on, you know, you I think you said fifty to million dollars of reinstatement cost. But 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 want.

Steve Spray: Yeah. Thanks, Greg. And as you can imagine, this is an active still an active catastrophe. And for right now, our range our net range that we’re providing you is our best estimate of ultimate loss, and we’re gonna just stick with that net range of the four hundred and fifty to five twenty-five.

Gregory Peters: Just not Okay. Not there’s not any move no.

Steve Spray: So many moving parts right now, Greg. Just providing a gross number. You know, we’re not we’re not ready to go.

Gregory Peters: Can can maybe pivot away from that then and just you know, I know the there 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 the fire risk. Can you can you talk about what your perspective is of that market looking forward? You know, once we get through paying all the losses, etcetera.

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

And with the wildfires, 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 regular the regulation rate environment and things of that nature. There’s 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 you know, fairly empathetically, face to face, and the lessons learned, although we are we’re looking at them actively, you know, that’ll take a little longer to to really formulate if we’re gonna make any changes going forward.

Gregory Peters: Okay. I’ll I’ll pivot away from that line of questioning. Just my my question broader broadly speaking is know, there’s there’s in in in the commercial lines market, maybe in the personal lines market ex California, you know, just to growing sense that the pricing cycle’s kind of peaked. Maybe it’s, you know, moderating price increases aren’t as robust, and some instances are going down. 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 I know part of your book has multiyear policies. Can you give us a snapshot of where those those policies reside and what the percentage of the total was?

Steve Spray: Yeah. Sure. So you know, as we as we just talked about, you know, on the for the major lines of business, commercial property, general liability, and auto were in the high single-digit range. Work comp is down the mid single-digit range, that’s been, you know, that’s pretty been 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 you know, the pricing tools that they have, are segmenting our book. So there’s a large percentage of our book, business, and as you know, we’re package underwriter. That may just as an example, may get a flat increase.

And there’s a percentage of our book it’s albeit smaller. You know, may get twenty or thirty percent. 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, eighteen months ago, was still earning into the book. So you know, I, you know, I I I suspect here throughout twenty twenty-five, you’ll still see rate coming into that commercial lines book.

Gregory Peters: Thank you for your answers.

Steve Spray: Sure. Thank you, Greg.

Operator: The next question is from Dean Crecydielo with KBW. Please go ahead.

Dean Crecydielo: Hi. I wanted to start and sort of dive deeper into the reserve strengthening both in commercial auto and the excess and surplus lines segment. I was just sort of curious, like, 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.

Mike Sewell: Yeah. Thanks for the question, Dean. This is Mike Sewell. Yeah, you’re you’re you’re keying in on a couple of points there. So on the personal auto, know, it’s it’s really I think our case incurred for some of the liability coverages that are in there, we’re showing an upward trend. And I would say that those were mostly for the twenty twenty-three and the twenty twenty-two 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 incurred are there, they were just they were they were just materializing greater than what we had had expected. E and S is about ninety percent casualty at least of our book. So it’s really kinda similar to the industry averages you know, that we’re seeing with inflation, etcetera.

So more prudent reserving was there. And as I indicated, we added nine hundred and ninety-eight million of IBNR. So for for the overall book, about a third of that went to commercial casualty. So you know, just prudent reserving, watching what we’re doing, and being being consistent with our process. So thanks for the question.

Dean Crecydielo: Yeah. Got it. That makes sense. And then just quickly on, you know, the commercial property, like, current accident, your ex-cat loss ratio. It it seemed abnormally low this quarter. Is there an any other color you can provide on why the profitability was so strong this quarter?

Steve Spray: Sure. Dean, this is Steve Spray. Yeah. We’ll take it. But what’s driving that is was just a a a drop in large losses has drove them. Absolute lion’s share of those commercial property results. But I would be you know, you can get you can get volatility with those large losses quarter to quarter. We’ve had it where we you know, where it’s gone the other way. So, again, prefer to look at the kind of the full year. Our teams I 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, you know, 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 Crecydielo: Got it. Thank you.

Steve Spray: Thank you, Dean.

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

Michael Zaremski: Hi. Morning. It’s Dan on for Mike. You know, if I could just go back to know, adding to commercial casualty, IBNR. You know, you’re still adding to those levels year over year, maybe a little less so in magnitude than twenty twenty-three. You just talk about the lost cost inflation trend that you’re seeing now and how that’s changed throughout the year? Thanks.

Steve Spray: Sure. Mike, Steve Spray again. Yeah. We you know, as you know, we don’t disclose a a specific loss cost increased. But I would say, maybe I’ll answer this a little broader too, is we feel we feel that that our rates, our premiums again, this is on a prospective basis. Everything we do with rate making is prospective that that our our pricing is exceeding or or matching loss cost? The only one caveat on that would be with the workers’ compensation line of business.

Michael Zaremski: Okay. Thanks. Then maybe just on know, the casualty trend. You know, what how much of that would you say is a reaction to since he’s contractors industry exposure, I think some peers have talked about this industry as being, you know, overly exposed to social inflation.

Steve Spray: Yeah. I mean, 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 into the umbrella off of auto commercial auto losses. You know, 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.

Michael Zaremski: Okay. Thanks. Then also just on workers’ comp, you mentioned know, that’s the only line of business where you’re seeing trend above pricing. Just, you know, there was an acceleration reserve releases and comp. This year. Are there any thoughts to maybe adjusting that pick going forward? Or, you know, taking some more of the good news upfront?

Steve Spray: Yeah. That’s something that know, we talked regularly here with 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, and know, calendar year wise, the the results continue to be favorable. So we’ll take it. But your points are 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.

Michael Zaremski: 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.

Steve Spray: 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 is now concluded. Thank you for attending today’s presentation. You may now disconnect.