Cincinnati Financial Corporation (NASDAQ:CINF) Q4 2023 Earnings Call Transcript February 7, 2024
Cincinnati Financial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the Cincinnati Financial Corporation Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] Please note today’s event is being recorded. I’d now like to turn the conference over to Dennis McDaniel, Investor Relations Officer. Please go ahead, sir.
Dennis McDaniel: Hello. This is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our Fourth quarter and full year 2023 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, cinfin.com/investors. The shortest route to the information is the quarterly results link in the navigation menu on the far left. On this call, you’ll first hear from Chairman and Chief Executive Officer, Steve Johnston; and then from Executive Vice President and Chief Financial Officer, Mike Sewell. After their prepared remarks, investors participating on the call may ask questions.
At that time, some responses maybe made by others in the room with us, including President, Steve Spray; Chief Investment Officer, Steve Soloria; and Cincinnati Insurance’s Chief Claims Officer, Marc Schambow; and Senior Vice President of Corporate Finance, Theresa Hoffer. First, please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to these risks and uncertainties, we direct your attention to our news release and to our various filings with the SEC. Also, a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and therefore, is not reconciled to GAAP.
Now, I will turn over the call to Steve.
Steve Johnston: Thank you, Dennis and good morning. Thank you for joining us today to hear more about our results. We had strong operating performance in the fourth quarter, and I am happy to see that our hard work is reflected in the progress we are making. Net income rose $170 million to nearly $1.2 billion for the fourth quarter compared with the fourth quarter of last year, including $18 million more benefit on an after-tax basis in the fair value of securities still held in our equity portfolio. Non-GAAP operating income for the fourth quarter of 2023 was up 78% or $157 million versus a year ago. And on a full year basis, it was 42% higher than 2022. Our 87.5%, fourth quarter property casualty combined ratio was 7.4 percentage points better than in 2022, with the catastrophe loss ratio representing 6.5 points of the improvement.
That strong underwriting performance followed our recent pattern of improvement, resulting in a 94.9% full year 2023 combined ratio. That was 3.2 percentage points better than last year, including a decrease of 0.5 points in the catastrophe loss ratio. Our 2023 ex-cat accident year combined ratios were also favorable compared with 2022, improving 2.1 percentage points to 85.7% for the fourth quarter and 1.8 points to 88.4% for the year. We saw positive momentum in many areas of operating performance. Growth for consolidated property casualty net written premiums accelerated, reaching 13% for the fourth quarter, including 10% for renewal premiums and 30% for new business premiums. As part of our ongoing efforts to improve performance and to counter the continuing effects and inflation on insured losses, we combine pricing segmentation by risk with average price increases and careful risk selection.
Estimated average renewal price increases for the fourth quarter continued at a healthy pace. Our Commercial Lines Insurance segment, again, averaged near the low end of the high single-digit percentage range, while our Excess and Surplus Lines Insurance segment continued in the high single-digit range. Personal Lines for the fourth quarter included auto, continuing in the low double-digit range and homeowner continuing near the low end of the high single-digit range. Policy retention rates in 2023 were similar to 2022, with our Commercial Lines segment down slightly, but still in the upper 80% range and our Personal Lines segment, up slightly but still in the low to mid-90% range. Briefly reviewing operating performance by Insurance segment, I’ll focus on the full year results.
Although I will note that each segment improved their combined ratios in the fourth quarter compared to last year as they continue to grow profitably. Our Commercial segment improved its full year 2023 combined ratio by 3.0 percentage points compared with 2022 and grew net written premiums by 4%. Our Personal Lines segment grew net written premiums by 26%, with growth for middle-market business in addition to Cincinnati Private Client business, its combined ratio was 1.2 percentage points higher than last year due to the catastrophe loss ratio rising 3.7 points. Our Excess and Surplus Lines segment was very profitable, producing a 2023 combined ratio of 90.6% with net written premium growth of 14%. Both Cincinnati Re and Cincinnati Global were also very profitable.
Cincinnati Re’s full year combined ratio was an excellent 77.7%. Its net written premiums were 5% lower than in 2022, reflecting our opportunistic positioning of the portfolio through evolving market conditions. Cincinnati Global’s combined ratio was also excellent at 75.5%, with 22% growth in net written premiums. Our Life Insurance subsidiary grew profit and premiums too as full year 2023 net income rose 15% and earned premiums grew 4%. 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, terms and conditions for 2024 are fairly similar to 2023, other than an average premium rate increase of approximately 12%. The primary objective of our Property Catastrophe Treaty is to protect our balance sheet.
The treaty’s main change this year is adding another $100 million of coverage, increasing the top of the program from $1.1 billion to $1.2 billion. Should we experience a 2024 catastrophe event totaling $1.2 billion in losses, we will retain $423 million compared with $617 million in 2023 for an event of that magnitude. We expect 2024 ceded premiums for these treaties in total to be approximately $180 million, more than the actual $136 million of ceded premiums for these treaties in 2023 due to additional coverage, rate increase and subject premium growth. Folks who follow our company know we prefer to track our success over a long time horizon. Consistent with that approach, we set a target for the value creation ratio, our primary performance measure, at an annual average of 10% to 13% over the next 5 years.
We believe the VCR is an appropriate measure since it’s driven by strong combined ratio results, premium growth that exceeds the industry average and contributions from our investment portfolio. Since 2016, our combined ratio of 5-year average has ranged from 94.3% to 96.1%, near the low end of the longer term target of 95% to 100% we have disclosed for many years. And for more than a decade, we have recorded results ahead of the industry for premium growth on a 5-year compound annual growth rate basis. Because we believe we can continue to perform at a high level we are setting our sights on a longer term combined ratio better than the past target, now targeting a 5-year average of 92% to 98%. While we will no longer publicly disclose annual targets for combined ratio and premium growth, we expect to continue our robust disclosure detail to help investors model and form their own expectations of future results.
This doesn’t mean that we’ll ignore the shorter term results. We recognize that it also means that to achieve our revised long-term target range, some years we need to reach combined ratios towards the lower end, knowing there could be some years like 2022 that come in near the higher end. I’ll conclude my prepared remarks as usual with the value creation ratio. Our 15.2%, 5-year annual average VCR as of year end 2023 exceeded our target range of 10% to 13%. VCR of 19.5% for full year 2023 included a contribution of 9.1% from net income before investment gains or losses while higher valuation of our investment portfolio and other items contributed 10.4%. Now Chief Financial Officer, Mike Sewell, will highlight investment results and other important aspects of our financial performance.
Mike Sewell: Thank you, Steve and thanks to all of you for joining us today. Investment income was a significant part of higher net income and improved operating results, up 15% for the fourth quarter and 14% for full year 2023 compared with the same periods of last year. Dividend income was up 7% for the quarter largely due to a special dividend from one of our stock holdings. On a full year 2023 basis, we added to the equity portfolio with net purchases totaling $14 million. Bond interest income, again, grew at a good pace, up 19% for the fourth quarter of the year. We continue to add fixed maturity securities to our investment portfolio with net purchases totaling $1.4 billion for full year 2023. The fourth quarter pre-tax average yield of 4.48% and for the fixed maturity portfolio rose 32 basis points compared with last year.
The average pre-tax yield for the total of purchased taxable and tax-exempt bonds during 2023 was 6.13%. Valuation changes for our investment portfolio during the fourth quarter of 2023 were favorable in aggregate for both our stock and bond holdings. Before tax effects, the net gain was $1.50 billion for the equity portfolio and $621 million for the bond portfolio. At the end of 2023, total investment portfolio net appreciated value was approximately $6.1 billion. The equity portfolio was in a net gain position of $6.7 billion, while the fixed maturity portfolio was in a net loss position of $570 million. Cash flow continued to benefit investment income as did rising bond yields. Cash flow from operating activities for full year 2023 was just over $2 billion matching last year.
Regarding expense management, we always intend to strive to an appropriate balance between controlling expenses and making strategic investments in our business. Our full year 2023 property casualty underwriting expense ratio at 30.0% was in line with 2022. While the fourth quarter ratio was 1.3 percentage points higher than last year, primarily due to higher profit sharing commissions for agencies and associate related expenses. Next, I will summarize loss reserve activity. Our approach remains consistent and aim 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 and then updated estimate ultimate losses and loss expenses by accident year and line of business.
Our quarterly study of updated paid and case reserve loss and loss expense data for our commercial casualty line of business considered how fourth quarter incurred amounts were higher than we expected, especially for the general liability coverages for older accident years. To reflect the continued uncertainty of ultimate losses and loss expenses, we increased our estimates for several prior accident years to levels more likely to be adequate. The net amount of the fourth quarter increase was $51 million, including $29 million for accident years prior to 2019. Commercial casualty unfavorable reserve development on a full year 2023 basis was fairly small at $15 million. Only 0.5% of the year-end 2022 reserve balance. Prior accident year reserve development for commercial umbrella during 2023 and was a favorable $6 million.
During 2023, our net addition to total property casualty loss and loss expense reserves was $682 million, including $634 million for the IBNR portion. For full year 2023, we experienced $215 million of property casualty net favorable reserve development on prior accident years that benefited the combined ratio by 2.8 percentage points, marking 35 consecutive years of net favorable development on prior accident year loss and loss expense reserves. On an online basis by accident year, net reserve development for full year 2023 included a favorable $137 million for 2022, favorable $21 million for 2021, favorable $68 million for 2020 and an unfavorable $11 million in aggregate for accident years prior to 2020. I’ll conclude with a few capital management highlights.
Another area where our approach includes careful consideration of the long-term. We paid $116 million in dividends to shareholders during the fourth quarter of 2023 and did not repurchase any shares. Our view of our financial flexibility and our financial strength is that both remain in excellent shape. Parent company cash and marketable securities at year-end was nearly $5 billion. Debt to total capital continue to be under 10%. And our year-end 2023 book value of $77.06 per share means the $12.1 billion of GAAP consolidated shareholders’ equity provides plenty of opportunity for profitable growth by supporting $8.1 billion of annual property casualty net written premiums. Now I’ll turn the call back over to Steve.
Steve Johnston: Thanks, Mike. Before we open the call for questions, I’d like to comment on our recent leadership and Board announcements. Effective at our annual shareholder meeting in May, President, Steve Spray, will add the role of Chief Executive Officer. Steve is the right person to build on our decade of profitable growth. He understands the importance of our agency-centered strategy and the unique advantages it brings. I’m confident in his ability to bring innovative ideas together with the hallmarks of Cincinnati Insurance to create opportunities for associates, agents and shareholders. I look forward to continuing to work with him as Chairman of the Board. We also announced the addition of Steve and Peter Wu as Cincinnati Financial Directors.
Peter has exceptional experience in the world of predictive analytics, data modeling and artificial intelligence. I’m honored that he has agreed to join our Board. Finally, the Board set the stage for a 64th consecutive year of raising shareholder dividends by increasing the dividend 8% to $0.81 per share. From the Board to the leadership team, to associates at every level of our company, we have the perfect people in place to create a bright future for Cincinnati Financial. As a reminder, with Mike and me today are Steve Spray, Steve Soloria, Marc Schambow and Theresa Hoffer. Rocco, please open the call for questions.
Operator: Absolutely. [Operator Instructions] Today’s first question comes from Michael Phillips with Oppenheimer. Please go ahead.
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