辛辛納提金融 (CINF) 2014 Q1 法說會逐字稿

Good morning, my name is Jay and I will be your conference operator today. At this time I would like to welcome everyone to the Cincinnati Financial first-quarter 2014 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. I will now hand the call over to Mr. Dennis McDaniel, Investor Relations Officer. Please go ahead.

Hello, this is Dennis McDaniel from Cincinnati Financial. Thank you for joining us for our first-quarter 2014 earnings conference call. Late yesterday we issued a news release on our results along with our supplemental financial package including our quarter-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 will first hear from Steve Johnston, President and Chief Executive Officer, and then from 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 Committee Chairman, Jack Schiff Junior; Chairman of the Board, Ken Stecher; Chief Insurance Officer, J.F. Scherer; Principal Accounting Officer, Eric Matthews; Chief Investment Officer, Marty Hollenbeck; and Chief Claims Officer, Marty Mullen.

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, please -- 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. With that I will turn the call over to Steve.

Good morning and thank you for joining us today to hear more about our first-quarter results. While severe winter weather interrupted our recent string of quarterly property-casualty underwriting profits, we continue to be confident that our initiatives will drive long-term profit and will steadily grow our insurance operations.

We had another solid quarter of price increases in excess of our loss cost trends and our mix of business continues shifting in a favorable direction as we get more rate on lower margin policies and retain higher margin policies.

We continued to outpace the industry in premium growth, delivering new services to help our agents grow while we carefully underwrote and priced each risk. And we grew investment income by 5% over the first quarter of last year.

Our first-quarter combined ratio was just over 100% with a catastrophe loss ratio roughly two-thirds higher than our five-year average for the first quarter.

For our Commercial Lines segment we experienced the highest first-quarter catastrophe loss ratio in at least 10 years and still generated a small underwriting profit. In addition to higher than typical first-quarter effects from natural catastrophes, we experienced an unusually high amount of weather-related losses that were not part of a named catastrophe event for the industry.

On a total property-casualty basis, our ratio of non-catastrophe weather for the first quarter of 2014 was 3.6 percentage points higher than last year's first quarter and was at its highest level since the first quarter 2009.

Premiums continue to grow within the range we expected, our property-casualty net written premiums grew by 7% and we continue to benefit from greater pricing precision. Commercial policies that renewed during the first quarter had estimated average price increases in the mid-single-digit range. The average was near the lower end of the mid-single-digit range and includes the muting effect of three-year policies that were not yet subject to renewal pricing during the first quarter.

As usual some lines of business had average renewal price increases that were stronger than others. For instance, our smaller commercial property policies had an average increase near the upper end of the high-single-digit range.

Consistent with the fourth quarter, renewal price increases for our Excess & Surplus line segment continue to be in the high-single-digit range, and for our Personal Lines segment that increase was in the mid-single-digit range.

Our first-quarter 2014 new business premiums slowed compared with a year ago reflecting pricing and underwriting discipline. The first-quarter decrease in our commercial lines new business premiums was essentially due to a reduction in new larger worker's compensation policies. New business written premiums for our major package lines -- commercial casualty and commercial property, grew 10% and 6% respectively.

The reduction in our personal lines new business premiums was as expected reflecting the efforts of our recent underwriting profitability actions, higher premium rates and greater precision in our pricing. We believe the new business we are getting is a higher quality, the homes we are writing have newer roofs and more of them are higher value homes. The larger portion of our personal lines new business is packaged to include both home and auto.

We also experienced satisfactory premium growth in both our Excess & Surplus lines segment and in our Life Insurance segment, both producing operating profits. We continue executing on initiatives to improve insurance profitability and to drive premium growth.

One initiative that adds premium growth over time is our careful selection and appointments in new agencies. In the first quarter of 2014 we appointed 27 new agencies. We also reported investment income growth for the third quarter in a row. First quarter 2014 investment income would have been higher than a year ago even without the effect of suppressed first quarter 2013 dividends.

You will recall that we reported about $5 million of special or accelerated dividends at the end of 2012 as issuers responded to anticipated tax law changes.

I will conclude with our primary measure of financial performance, the value creation ratio. While that measure is most applicable for measuring long-term performance and creating shareholder value, our 2.6% first-quarter result gives us a good start toward our longer-term objective of an annual ratio averaging 10% to 13%.

Our Chief Financial Officer, Mike Sewell, will now add his comments about performance and related financial items.

Great, thank you, Steve. And thanks to all of you for joining us today. I will begin with a few important details about our investment portfolio.

The first quarter of 2014 again illustrated the benefit of our equity investing strategy. Our book value benefited from appreciation in our stock portfolio valuation and the bond portfolio also made a positive contribution. Our stock portfolio's pretax net unrealized gains are approaching $1.9 billion and the dividend income from the portfolio continued to increase.

Yields for our bond portfolio again moved slightly lower as the first-quarter 2014 pretax yield of 4.82% was 11 basis points lower than a year ago. Taxable bonds, representing about 70% of our bond portfolio, had a pretax yield of approximately 5.29% at the end of the first quarter of 2014.

The average yield for new taxable bonds purchased during the first quarter of 2014 was 4.51%. For the same period our tax exempt bond portfolio yield was 3.85% and purchases during the quarter yielded 3.19%.

Our bond portfolio's effective duration measured 4.5 years at the end of the first quarter, unchanged from year end. Cash flow from operating activities continue to benefit investment income. At $129 million for the first quarter of 2014, net operating cash flow more than doubled the same period a year ago. We continue to carefully manage expenses helping to reduce the first quarter underwriting expense ratio by a full point compared to a year ago.

Moving to loss reserves, we continue to follow a consistent approach seeking to remain well into the upper half of the actuarially estimated range of net loss and loss expense reserves. For the first quarter of 2014, favorable development of prior accident years at 3.1% was close to the full year 2013 ratio or 4.1%.

We added net IBNR reserves in the first quarter and property-casualty growth reserves in aggregate for all accident years was $82 million or 2% from year-end. As a result of a larger than expected accident year 2013 loss payments for umbrella in general liability, we recognized $8 million of unfavorable development during the first quarter in our commercial casualty line of business.

Despite recognizing that development, the loss and loss expense ratio for that line's accident year 2013 is in line with accident years 2012 and 2011 after updating reserve estimates for all years as of March 31.

Commercial casualty has historically been among our largest and most profitable lines of business. In each of the last 10 years we have reported favorable annual reserve development and our consistent approach to reserving gives us confidence in the adequacy of current reserves for that line.

Our first quarter reserve development by accident year was $18 million unfavorable for accident year 2013 driven by the commercial casualty lines of business and $23 million favorable for accident year 2012, $11 million favorable for accident year 2011 and $14 million favorable for all older accident years in the aggregate.

Our financial strength and liquidity remain in excellent condition. We repurchased 150,000 shares during the first quarter and average cost of $47.71 per share. This repurchase activity was again a maintenance type action intended to partially offset the issuance of shares equity compensation plans.

Cash and marketable securities at the parent Company remain at over $1.5 billion at the end of the first quarter. Our property-casualty premium to surplus ratio remained at 0.9 to 1 providing plenty of capital to support continued premium growth of our insurance business.

I will conclude my prepared comments as usual by summarizing the contributions during the first quarter to book value per share. Property-casualty underwriting decreased book value by less than $0.01. Life insurance operations added $0.06. Investment income, other than life insurance and reduced by noninsurance items, contributed $0.36.

The change in unrealized gains at March 31 for the fixed income portfolio net of realized gains and losses increased book value per share by $0.35. The change in unrealized gains at March 31 for the equity portfolio, net of realize gains and losses, increased book value by $0.19. And we declared $0.44 per share in dividends to shareholders.

The net effect was a book value increase of $0.52 during the first quarter to $37.73 per share. And with that I will turn the call back over to you, Steve.

Thanks, Mike. While the insurance business will always be challenging and challenged by the weather or other forces, investors, agents, associates and others can count on Cincinnati Financial to remain steady in execution of our strategy.

That includes openness and integrity in how we operate and we are pleased to be recognized again by Forbes in its inaugural list of the Americas 50 most trustworthy financial companies we are the top-performing Company, this marks the fourth time in a row that Forbes has recognized us on one of its lists of trustworthy companies.

We appreciate this opportunity to respond to your questions and also look forward to meeting in person with many of you throughout this year. As a reminder, with Mike and me today are Jack Schiff Junior, Ken Stecher, J.F. Scherer, Eric Matthews, Marty Mullen and Marty Hollenbeck. Jay, we are ready for you to open the call for questions.

(Operator Instructions). Bijan Moazami, Guggenheim.

If I am looking at the accident year loss ratios, typically if you look at the industry 2011-2012 there were bad accident years ending up (inaudible) 2013 and looks to be positive. Could you talk a little bit about what is going on in commercial lines casualty, commercial casualty -- why you are seeing adverse losses there in 2013?

Is there anything in particular happening? And I understand that you guys have historically been incredibly conservative. So in terms of loss cost trend if you could provide a little bit more color would be great.

Sure, Bijan, good question and thank you for asking. We have, as you mentioned, been very consistent in our approach, conservative in our approach. And that is reflected in what you see today by posting some upward movement in our pick for the most recent accident year of 2013.

I think the important thing to look there is that we did see a little bit in terms of more or higher payments and so we reacted to it. But when you look at the accident year, even after we adjusted the pick upwards, it is still very consistent in the mid-50 loss ratio range for where we have been the last few years.

And we still feel very confident about the line, very confident about our reserving position, feel we are getting rate in excess of our loss cost trend. And probably more important really segmenting the book there and getting more rate on those that need more rate and really working hard to retain those that have the highest profit potential.

Great. As far as the personal lines goes, there was a very significant increase in current accident year loss ratio before cat, even when I adjust for the non-catastrophe weather related losses. Is there anything in particular going on in there or I am counting my non-catastrophe weather-related losses somewhat and a wrong way?

No, I think your analysis is good. It is a line we are keeping a close eye on. Again I think we feel confident in that the trends are within achievable rate increases. I think it is a first quarter which there is a lot of uncertainty there that we reflect in terms of really for an accident quarter the claim has to have occurred in the first quarter and been reported and reserved.

So I think we are taking a cautious approach there. But to your point, one we will be keeping a close eye on. And I think whether it is weather or not weather, a lot of it was driven by the physical damage part of it.

Great. One last question. Could you talk a little bit about what you expect the property inspections that you are planning to do for 2014 impacting your level of rate increases this year?

Bijan, this is J.F. Scherer. what we are trying to concentrate on the property inspections and in addition to that more loss control inspections is taking more underwriting action not necessarily by raising rates, but by recognizing conditions of property that would cause us to perhaps raise deductibles, suggest to the policyholder changes that they should make to minimize the possibility of loss or to reduce a large loss.

There are a number of, and we have mentioned this before, there are a number of accounts that once we inspect them, on homeowners, for example, we discover that a house is in a different protection class than what we had in our file. And so consequently we will get a rate increase there.

From time to time we will also note that there is an undervalued circumstance both in commercial property or personal lines property, a home owner, and there will be a corresponding increase about coverage amount and there will be a corresponding increase in premium from that.

So the inspections really are designed to just provide us with a better look at the quality of the overall book of business that we have. Sometimes with which, as you point out, there would be a rate increase associated with it, most times, however, we are taking underwriting action to improve the profile.

Thank you.

Paul Newsome, Sandler O'Neill.

If we look at the reserve charge from casualty, are we able to (technical difficulty) pull out may be this discrete items and then look at what happened there from a reserve perspective. Are we still at a sort of typical level of reserve releases if we exclude those items?

I think that the reserve in terms of how we are doing it is very consistent with our approach. The actual overall reserve release was pretty consistent with the full year of 2013, maybe even a little bit more favorable than it was first quarter year ago.

As we point out with the first quarter we just completed the full-year analysis just a few weeks ago so we are not going to be making a whole lot of changes there. But we are prudent, we are conservative and so when we saw, and to your point, dug down a little bit deeper we saw a little bit more higher-than-expected payments and the commercial casualty on a package, our CMP liability and also our umbrella. And so we reflected it.

Thank you, that is it for me this quarter. Appreciate it.

Vincent DeAugustino, KBW.

Just going back to one of your initiatives that we talked about a couple of quarters ago on the predictive claims launch that I think was supposed to go live in the third or fourth quarter after worker's comp last year. I'm just curious maybe how the launch went? And if you happen to have any early thoughts on how might that process from a loss cost savings might be trending so far?

Good morning, Vince, this is Marty Mullen in claims. Yes, actually April 1 we went live with our first iteration of the predictive model for worker's comp claims. We are quite encouraged with the initial results of the model. It is providing data and metrics on new claims as they move forward projecting the outcomes or projecting potential for outcomes for loss costs and return to work issues.

So we are pretty excited with what we have experienced so far. What we are looking forward to is the next iteration will be to identify and apply the model to existing claims that have been open for a month to highlight tendencies in those claims, which may require a different type of attention via nurse case management or certain prescription attention. So it is live, active and we are pretty encouraged.

All right, sounds good. And then, Marty, just to stick with you -- I guess it would be the right way to go on this anyway. So on an earlier call today there was some discussion around some of the harsher winter weather impacting contractor activity and that basically leading to a little bit of a benefit on worker's comp.

And I am just kind of curious if on some of the underlying loss trends, I guess particularly on frequency, if you happen to be seeing anything similar to that in the Cincy worker's comp book?

I think our first quarter for work comp was fairly quiet or fairly normal. I can't say that we saw an uptick in that type of activity as far as on a claim count basis. So I don't think we had experienced that.

Okay. And then this is kind of a follow-up to the earlier reserve discussion here on this call. But if we go back to some of the older accident years, I'm looking at index reserve performance, one of the things that we've sometimes seen when Cincinnati has responded to some emerging trends is maybe a little bit of adverse reserve (technical difficulty) in the immediately following initial calendar year.

But then ultimately if you track how that accident year develops, more often than not you end up getting your net cumulative favorable reserve (inaudible) even including that initial kind of increase.

And so, what I am just kind of curious about and kind of speaks to Paul's question a little bit, do you guys feel like it is consistent with your historical prudence that potentially implies that we'll ultimately see -- if things kind of do not deteriorate net favorable development on accident year 2013? Or is it kind of as we look at some of these more concrete payment trends that really, no, maybe that is not the right way to think about it?

I think it is the right way, Vincent. I think it is the same stable approach and, as you were making your question, I was thinking to those excellent charts you have in your reports, the line graphs that show as time progresses accident years develop favorably. And I don't think that we see anything that would make us feel differently.

Okay, sounds good. That is all I had and look forward to talking to you soon.

(Operator Instructions). Mark Dwelle, RBC Capital.

A couple questions. First on the expense ratio, very good year-over-year improvement and -- although it was fairly consistent with the prior quarter. Anything unusual in either last year's number that made it high or this year's number that made it a little lower or is it just continued blocking and tackling?

That is a great question and thanks for it. There is probably going to be a little bit of a combination that is going to be in there. Of course you are going to have in any given period some accruals, timing of payments, things that occur that might make it bounce around a little bit.

I would put the change here that you are seeing a little bit more along the lines of an overall we're controlling the increase of our spending on expenses and we are letting the increase in premiums outrun it. And so, I think that is really going to be the major driver that you are seeing.

There was a full point improvement. If you were to look at the first quarter last year, which was at 32.2%, and where we ended up the year at 31.9%, I am not sure if that trend will necessarily continue for the rest of this year when you look at the 31.2% because you will have some volatility.

But I am very encouraged at the way that we are controlling our expenses. There may be some fluctuations that are in there and what will probably end up in the low 31%s by the end of the year.

That's helpful, thanks. Second question maybe for J.F. as much as anybody, but anybody can chime in. Are you seeing any change in competitive behavior as far as competitors being I will say either more defensive on defending their own books of business or alternatively more aggressive on attacking your books of business?

And really we have heard a number of comments from different carriers. We are seeing signs of higher overall premium retention ratios. Just curious what you are seeing on the ground as far as how that dynamic is playing out.

Mark, I think you hit an important factor on defending renewals. Last year at this time, for example, there were still carriers that were pre-announcing, if you will, to their agents that they intended to be very aggressive about increasing rates.

Just trying to set the stage for it, I think consequently a lot of the business that would have been written with that carrier would have found itself in the marketplace being shopped. I think what we are seeing just relative to the competitive environment is that there is more defense of renewals.

What I would say if that carrier is a little more comfortable with where they had their rates, they are signaling that they will be happier with modest increases and therefore more aggressive perhaps about defending the renewal, not wanting to lose it. So we are clearly seeing that in the marketplace.

We are seeing some signs of a little bit of added competitiveness from some carriers, a few examples of bonus commissions being announced by some carriers to go after business. I can't say that we feel that our book of business is being specifically targeted by anyone. We haven't noticed that.

One of the things about our new business, for example, for the first quarter, and we had a significant first quarter last year. I mean it was really a heck of an increase in new business in the first quarter. We were very pleased with what we saw in our ability to write business both in property and casualty lines to have an increase over a big increase last year.

The only thing we saw in terms of new business in commercial lines -- and I don't think it was an example of a competitive marketplace, is that we just didn't write as many larger worker's comp policies as new business as we would have. And I don't know in the second quarter we might write an extraordinary amount of it simply because of just timing, things of that nature.

So, I think as a general statement as far as the marketplace is concerned, it seems that the marketplace has pricing more in line with the way it would want it to be. Somebody else's renewal will be less attractive or less easy to compete for this year. And so that is how I would size up the whole marketplace in general.

Thanks very much. That is great color.

There are no additional questions at this time. I would like to turn the call back to Mr. Johnston for closing remarks.

Thank you, thank you all for your excellent questions and for joining us today. We hope to see some of you tomorrow at our annual shareholder's meeting, it is at the Cincinnati Art Museum. Others are welcome to listen to our webcast of the meeting available at CinFin.com/investors. We look forward to speaking with you again on our second-quarter call. Thank you very much.

This concludes today's conference call, you may now disconnect.