Operator: Good morning, ladies and gentlemen and welcome to the Cincinnati Financial Corporation Second Quarter 2023 Earnings Conference Call. [Operator Instructions] 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, sir.
Dennis McDaniel: Hello. This is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our second quarter 2023 earnings conference call. Late yesterday, we issued the 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'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 may be 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 Hopper. 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'll turn over the call to Steve.
Steve Johnston: Good morning and thank you for joining us today to hear more about our results. Net income of $534 million for the second quarter of 2023 was quite a change from the net loss of more than $800 million for last year's second quarter. As we've noted in the past, large income swings can occur as gains and losses from securities still held in our equity portfolio run through net income. Last year, we saw a reduction in portfolio fair value. And this year, we recognized a significant investment gain. We believe the value of our equity portfolio will continue to grow over the long term. As of June 30, it had $6.1 billion in appreciated value, increasing 8% since the end of the first quarter. Non-GAAP operating income of $191 million for the quarter more than doubled the $94 million from a year ago despite catastrophe losses that were $11 million higher on an after-tax basis.
Our 97.6% second quarter 2023 property casualty combined ratio was 5.6 percentage points better than last year's second quarter, including a decrease of 0.4 points for catastrophe losses. The 90.4% ex-cat accident year combined ratio for the second quarter was 2.4 percentage points better than the same period a year ago and is another important indicator of improved performance. Despite the increase in catastrophe losses and ongoing elevated inflation effects, we continue to see reasons for confidence about performance for the second half of the year. Pricing continued to accelerate during the second quarter of this year and we also worked to address inflation in other ways, such as changing factors that adjust premiums to account for rising property costs.
We reported improved underwriting performance ratios in just about every major line of business compared with the first quarter of this year. On a current accident year basis, measured at June 30 before catastrophe losses, our 2023 and consolidated property casualty loss and loss expense ratio improved from 2022 by 4.5 percentage points on a case incurred basis which included 0.6 point improvement on a paid basis. For the same period, we increased the incurred but not reported or IBNR component of the ratio by 4.7 points as we continue to recognize uncertainty regarding ultimate losses remaining prudent in our reserve estimates until longer-term loss cost trends become more clear. Similar to the first quarter, we earned a small underwriting profit for our commercial umbrella line in the second quarter.
In our commercial casualty line of business in total had an estimated combined ratio of approximately 90%. Our underwriters continue to do an excellent job in risk selection and pricing Importantly, Asians appointed by Cincinnati Insurance continue to produce profitable business for us in an outstanding fashion. Underwriters emphasize retention of profitable accounts addressing ones that we determine have inadequate pricing while also seeking profitable new business. Estimated average renewal price increases for the second quarter were higher than the first quarter for each of our major lines of business. Our Commercial Lines Insurance segment averaged near the low end of the high single-digit percentage range, while our excess and surplus lines insurance segment moved higher in the high single-digit range.
Personal Lines for the second quarter included auto in the high single-digit range and homeowner in the mid-single-digit range. In terms of net written premiums, consolidated property casualty growth was 9% for the second quarter of 2023. That included an 11% increase in second quarter renewal written premiums with a significant portion from higher levels of insurance exposures as we factor in elevated inflation. Next, I'll briefly highlight premium growth and profitability by Insurance segment. Commercial Lines grew second quarter 2023 net written premiums 3%, reflecting discipline, particularly for commercial umbrella risks. Its combined ratio was 9.4 percentage points better than a year ago, including 1.5 points from lower catastrophe losses.
We see the second quarter 10% reduction in new business written premiums as an expected result of pricing and underwriting discipline. Personal Lines grew net written premiums 23%, with growth in middle market accounts in addition to Cincinnati Private Client business for the high net worth clients and our agencies. Its combined ratio was 4.5 percentage points better than a year ago despite an increase of 0.6 points from catastrophe losses. Excess and surplus lines had a combined ratio of 92.2% and net written premiums grew 16%. Its combined ratio was 7.1 percentage points higher than a year ago, including a 9.9 point increase in the IBNR component. Both Cincinnati Re and Cincinnati Global continued to enhance our profitability. Cincinnati Re had a strong 73.7% combined ratio for the second quarter of 2023.
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Its net written premiums essentially matched last year's second quarter, while casualty premiums decreased as a result of fewer attractive opportunities in certain segments of the market, property net written premiums increased by 27% and largely due to a combination of higher pricing and market opportunities. Cincinnati Global's combined ratio was 88.3% with net written premiums continuing strong growth at 19%. Our life insurance subsidiary continued to report excellent results in the second quarter with net income up 91% from last year in term life insurance earned premium growth of 4%. As I usually do, I'll conclude with the value creation ratio, our primary measure of long-term financial performance. Our second quarter 2023 VCR was 4.0%, another strong result.
Net income before investment gains or losses contributed 1.8%, while favorable valuation of our investment portfolio added another 2.2%. Now our Chief Financial Officer, Mike Sewell, will highlight other important factors about our financial performance.
Mike Sewell: Thank you, Steve and thanks for all of you for joining us today. Investment income continued at a strong pace of 13% for the second quarter of 2023 versus last year's second quarter. As expected, dividend income decreased 3% for the quarter due to 2 items we touched on last quarter. First, we are seeing dividend rates increase more slowly. Second, in last year's second quarter, we received a $5 million special dividend from 1 of our stockholdings that didn't repeat this year. Net equity security purchases for the first half of 2023 totaled $93 million. Bond interest income rose 19% in the second quarter compared with the second quarter of 2022. We added more fixed maturity securities to our investment portfolio with the net purchases totaling $732 million for the first 6 months of the year.
The second quarter pretax average yield of 4.34% for the fixed maturity portfolio was 34 basis points higher than a year ago. The average pretax yield for the total of purchased taxable and tax-exempt bonds during the second quarter of 2023 was 5.88%. Valuation changes in aggregate for our equity portfolio during the second quarter of 2023 were favorable but were unfavorable for the bond portfolio. Before tax effects, the net gain for the equity portfolio was $459 million, while the net loss for the bond portfolio was $158 million. At the end of the quarter, total investment portfolio net appreciated value was approximately $5.3 billion. The equity portfolio was in a net gain position of $6.1 billion, while the fixed maturity portfolio was in a net loss position of $838 million.
Strong cash flow again contributed to investment income growth in addition to rising bond yields boosting interest income. Cash flow from operating activities for the first 6 months of 2023 was $825 million, up 9% from a year ago. We continue to emphasize expense management with a balance between controlling expenses and making strategic investments in our business. The second quarter 2023 property casualty underwriting expense ratio was 0.2 percentage points lower than last year as premium growth outpaced growth in total expenses. Next, I'll comment on loss reserves. We continue to use a consistent approach that targets 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 estimated ultimate losses and loss expenses by accident year and line of business.
For the first half of 2023, our net increase in property casualty loss and loss expense reserves was $452 million, including $358 million for the IBNR portion. During the second quarter, we experienced $101 million of property casualty net favorable reserve development on prior accident years that benefited the combined ratio by 5.5 percentage points. On an all-lines basis by accident year, net reserve development for the first 6 months of 2023 included: favorable $99 million for 2022; unfavorable $5 million for 2021; favorable $49 million for 2020 and a favorable $17 million in aggregate for accident years prior to 2020. Regarding capital management, our approach remains consistent as we pay dividends to shareholders and repurchase shares that include maintenance intended to offset shares issued through equity compensation plans.
We still believe our financial flexibility is outstanding and that our financial strength is in excellent shape. During the second quarter of 2023, we repurchased approximately 398,000 shares at an average price per share of $104.48. We also paid $117 million in dividends to shareholders during the quarter. As usual, I'll conclude with a summary of second quarter contributions to book value per share. They represent the main drivers of our value creation ratio. Property casualty underwriting increased book value by $0.24. Life insurance operations increased book value $0.15. Investment income other than life insurance and net of noninsurance items added $0.86. Net investment gains and losses for the fixed income portfolio decreased book value by $0.81.
Net investment gains and losses for the equity portfolio increased book value by $2.31 and we declared $0.75 per share in dividends to shareholders. The net effect was a book value increase of $2 per share during the second quarter to $7.33 per share. Now, I'll turn the call back over to Steve.
Steve Johnston: Thanks, Mike. We are in the challenging insurance market and I'm proud of the way our associates are navigating it. We believe we are taking the necessary actions to continue delivering profitable growth through all insurance cycles. In the last month, to third-party organizations agreed. S&P affirmed our high financial strength ratings and we were also again included on the 50 list, recognizing our growth, profitability and shareholder return. We are 1 of only 4 companies named 32 times to the Property Casualty Awards 50 since the analysis began in 1991. As a reminder, with Mike and me today are Steve Spray, Steve Solaria, Marc Schambow and Theresa Hoffer. Vaishnavi, please open the call for questions.
