Dennis McDaniel; Vice President, Investor Relations Officer; Cincinnati Financial Corp
Stephen Spray; President, Chief Executive Officer, Director; Cincinnati Financial Corp
Michael Sewell; Executive Vice President, Chief Financial Officer, Principal Accounting Officer, Treasurer; Cincinnati Financial Corp
Michael Phillips; Analyst; Oppenheimer & Co., Inc.
C. Gregory Peters; Analyst; Raymond James
Good morning and welcome to the Cincinnati Financial fourth-quarter and full year 2024 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.
Hello. This is Dennis McDaniel at Cincinnati Financial.
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'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, Marc 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 the GAAP.
Now, I'll turn over the call to Steve.
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 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% 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 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 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 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 were also very profitable. Cincinnati Re grew net written premiums 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 and 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 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 pretax 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 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. Bond interest income grew 28% for the fourth quarter this year. Net purchases of fixed maturity securities totaled $1.1 billion for the quarter and $2.5 billion for the year.
The fourth quarter pretax average yield of 4.93% for the fixed maturity portfolio was up 45 basis points compared with last year. The average pretax 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, 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 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 lost reserves, where our approach remains consistent and aims for the net amounts in the upper half of the actuarial 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 '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 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 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 Spray
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're 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 and Milton 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, Marc Schambow, and Theresa Hoffer.
Gary, please open the call for questions.
Operator
(Operator Instructions)
Michael Phillips, Oppenheimer.
Michael Phillips
Just want to start off, I guess, I'd 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 Cinci Re to respond? And then maybe how should that translate into kind of premium for 2025 for that segment?
Stephen Spray
Yeah. Mike, are you talking specifically on Cincinnati Re or ceded re?
Michael Phillips
Well, I guess 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 -- there's going to be some opportunities, how you guys would respond and what that means for Cincinnati Re?
Stephen Spray
Yeah. Maybe I'll start with just the reinsurance market to your question, Mike.
First is, I think the reinsurers appropriately, the last couple of years, I think, 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.
We expect to pay all of our losses ground up plus the reinsurer's 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 Re, they're going to stay the course.
You heard, we had a extremely profitable 2024 inception to date with Cincinnati Re as is very profitable as well. They plan for cat. That's what they do. Their losses on specifically on the California wildfires were within expectation and they'll proceed throughout the year with their 2025 plan, no change.
Michael Phillips
Next question is, I ask, I wouldn't classify your umbrella exposure in general for your company as tiny, but it's only that outsized. But question related to sort of umbrella. And in personal lines, I think this quarter, I didn't see a lot -- for personal lines of umbrella, I didn't see a lot of change in claim connectivity in that two to five layer. But dollar amounts did move up.
So something's there, sort of $10 million plus, $25 million, $35 million of walls in the two to five layer. Any color you can add on anything in the quarter specifically that would help justify that extra amount of dollars in that layer? And then more broadly, after the quarter, anything you're seeing in umbrella excess layers that would cause any concerns?
Stephen Spray
Yeah. 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 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 the 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 in that personal lines umbrella book that causes us any concern.
Michael Phillips
Congrats on the quarter.
Stephen Spray
Yeah, thanks so much, Mike. Appreciate it.
Operator
Gregory Peters, Raymond James.
C. Gregory Peters
I want to go back to the comments on the fire loss. Could you provide some perspective on, 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 Spray
Yeah. Thanks, Greg.
And as you can imagine, this is still an active cat. And for right now, 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 million. Just not -- there's not so many moving parts right now, Greg. Just providing a gross number is -- we're not ready to go.
C. Gregory Peters
Can you maybe pivot away from that then and just, 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 talk about what your perspective is of that market looking forward once we get through paying all the losses, et cetera?
Stephen Spray
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 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 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. If 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. But I think right now, we are really focused on paying claims fairly, empathetically, face to face, and the lessons learned, although we're looking at them actively, that'll take a little longer to really formulate if we're going to make any changes going forward.
C. Gregory Peters
I'll pivot away from that line of questioning.
Just my question broadly speaking is, 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, they're going down.
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 Spray
Yeah, sure.
So 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 pretty well documented. So we're still seeing rate into that commercial lines book.
But I think the point estimate or the average, Greg, 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 may -- just as an example, may get a flat increase, and there's a percentage of our book, it's 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, was still earning into the book. So I suspect here throughout 2025, you'll still see rate coming into that commercial lines book.
Operator
Dean Criscitiello, KBW.
Dean Criscitiello
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 Sewell
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, it's really I think our case incurred for some of the liability coverages that are in there, we're showing a 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 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 casualties.
So just prudent reserving, watching what we're doing and being consistent with our process.
So thanks for the question.
Dean Criscitiello
And then just quickly on the commercial property like current, ex, and your ex-cat loss ratio, it seemed abnormally low this quarter. Is there any other color you could provide on why the profitability was so strong this quarter?
Stephen Spray
Sure. Dean, this is Steve Spray. Yeah, we'll take it.
But what's driving that 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 volatility with those large losses quarter to quarter. We've had it 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 net commercial property book, 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.
Operator
(Operator Instructions)
Michael Zaremski, BMO Capital Markets.
Unidentified Participant
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?
Stephen Spray
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 that our rates, our premiums, again, this is on a prospective basis, everything we do with rate making is prospective that our pricing is exceeding or matching loss costs.
And the only one caveat on that would be with the workers' compensation line of business.
Unidentified Participant
Then maybe just on the casualty trend. What -- how much of that would you say is a reaction to Cinci's contractors' industry exposure? I think some peers have talked about this industry as being overly exposed to social inflation.
Stephen Spray
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. A lot of the social inflation we see is under the umbrella off of commercial auto losses. 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.
Unidentified Participant
Then also just on workers' comp, you mentioned, that's the only line of business where you're seeing 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 up front?
Stephen Spray
Yeah. 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, I've been talking about the deterioration of work comp, pricing for, I don't know how long now.
And calendar year wise, the results continue to be favorable. So we'll take it. But your point's 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.
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 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.
